There are financial dangers when making the transition from selling your home to renting. If the potential buyer of your home cancels the contract on your home after you've already signed your new rental agreement, you could be in a double-payment bind.
After you have a buyer make an offer on your home, they have specific deadlines to meet before the purchase is complete. This is their due diligence period where they are responsible for inspecting the home, and securing financing. Typically a real estate contract will take about 30 days to close. During these 30 days the buyer can back out of the contract based on either inspections or on financing. These dates are negotiable, but most often buyers have 21 days to back out.
That presents a problem to sellers that are looking to rent a property after they sell their home.
We had a seller in this situation. They planned to build a new home, but needed a place to rent after her current home sold. She wanted good schools, a good neighborhood, and something they could live in for a short time frame. Here is the danger, if they sign a rental contract they are now bound to a new monthly payment. Even if the buyer of their home backs out during their due diligence period. If this happens you're left with a house payment AND a rental payment.
Here are 4 tips to help you avoid getting caught in this bind.
When you get an offer on your home be mindful of the following:
1. Negotiate & know the cancellation dates. Know when the buyer of your house can back out of the contract and still keep their earnest money. Negotiate the dates so that you feel comfortable with the timeline between the buyer's financial deadline and your settlement deadline. I usually aim for 7 days minimum difference. This will give you time to find a rental place after they've passed their final deadline, but before you have to move out.
2. Negotiate the possession date. In Utah on page 2 of the Real estate purchase contract there is a small paragraph that identifies when the buyer gets possession of your property. Watch this carefully, it can slide right by you if you don't keep an eye on it. Many times it will state at recording. That means you have to be out of your house pretty fast. Negotiate this to be 24 hours to 72 hours after closing. This will give you an extra 3 days to move.
3. Negotiate the earnest money. If your buyer offers $500 in earnest money and they cancel after their deadlines, the $500 won't cover much of your damages. Negotiate a higher amount. We have had sellers recently receive $2,000 to $5,000 after a buyer backed out of a contract in the last month.
4. Make sure the earnest money is deposited with a real estate brokerage NOT A TITLE COMPANY. The problem with depositing the money with a title company is you might not get your money without going to mediation if the buyer refuses to sign it over to you. If the earnest money is with a real estate brokerage the broker can sign it over to you without their buyer's signature because the broker determines if the deadlines were passed.
Once you know you're covered (steps 1-3) you are prepared to start looking for your rental and not be afraid about the double property bind.
Here are some tips on getting a rental.
1. If you are going to put down non-refundable money to hold your rental, be sure you have non-refundable earnest money from your buyers.
2. Be sure that your non-refundable deposit with the landlord matches or is lower than the earnest money of your buyer.
3. Make your lease contingent upon your home successfully closing.
By following these tips you will be able to secure a future place to live while leveraging your financial risk. The most risk you should have when doing this is taking the earnest money from your buyer and giving it to the landlord if things fall through.
Utah Dave - Daybreak Neighboorhood Expert and Local Resident