Sellers renting back homes while waiting for new one
Brokers, lawyers see spike in 'post-closing' occupancy agreements
Elliman broker Uri Hanoch recently worked with sellers who rented their apartment in the Grand Chelsea back from their buyer after the sale closed.In today’s tough market, most New York City sellers have no choice but to unload their properties before they close on a new home. In many cases, their mortgages depend on it.
However, that often leaves them with a limbo period during which they have no place to live. Now, brokers and lawyers alike say they’re seeing a spike in the number of sellers becoming temporary renters in the very homes they’re getting rid of.
So-called possession or post-closing occupancy agreements are written into contracts to allow sellers to temporarily rent their properties back after the closing. While they are far from new, they are increasing in frequency.
“Any given real estate closing is in the middle of a daisy chain of real estate closings,” said Aaron Shmulewitz, a partner at the law firm Belkin Burden Wenig & Goldman. “If there is a delay in one closing, it can easily delay other closings.”
Deanna Kory, a senior vice president at the Corcoran Group, said she has seen the fallout from the domino effect of buyers and sellers having to time their closings. In cases where a post-closing agreement does not exist, the seller can end up without a chair (or in this case, a home) when the music stops.
Recently, for example, the seller of a one-bedroom was buying a two-bedroom. The owners of the two-bedroom, whom Kory was representing, were upgrading and buying a three-bedroom.
But the buyer of the one-bedroom had a lock on an interest rate, and threatened to walk away if the seller didn’t close in a given time frame. With no available apartment to move into and no post-closing agreement written into the contract, the seller ended up having to find temporary housing.
While a post-closing agreement could have been a good solution to the problem, these agreements often depend on buyers having alternate living arrangements. Buyers who are renters, for example, can often extend their leases, while buyers who have multiple homes may have somewhere to stay until the seller vacates.
Uri Hanoch, a vice president at Prudential Douglas Elliman, recently had sellers who, despite a slew of offers, couldn’t find a buyer for their two-bedroom apartment in the Grand Chelsea at 270 West 17th Street. Their unit was priced just over $1 million, but the buyers they were attracting were lowballing in order to avoid the state’s 1 percent mansion tax, which kicks in for sales of $1 million and above (see “Six-figure discount”).
“I showed [the apartment] to about 200 people, if you include private showings and open houses,” Hanoch said. “But all the offers were coming in below a million.”
Then Hanoch figured out a way to hammer out a deal. The sellers had signed a contract on a new development condo that wasn’t yet ready for occupancy. One of their goals was to unload their current apartment, but not too quickly, lest they be left without a place to live.
“I said [to the buyer], ‘What if you got [the apartment] for just under $1 million, but you let the seller stay on for four months?'” said Hanoch, noting that the buyer was an investor looking to rent it out. “[That] was the equivalent of $20,000.”
The investor avoided the mansion tax, and the sellers avoided the hassle of moving to a temporary location and spending money on intermediate housing. Win-win.
With today’s precarious mortgages and new developments routinely extending their timetable, post-closing agreements are becoming more popular as it becomes harder to time a purchase and a sale. (During the boom, most sellers bought first, knowing that they could then quickly turn around and sell their own homes, but that paradigm has obviously changed.)
Buyers should make sure that a post-closing agreement doesn’t create a financial burden for them, lawyers say.
“At a minimum, it has to be a cost-neutral move for the buyer,” said Shmulewitz. “The seller should pay the maintenance and the common charges, [along with] the utility charges and the insurance on the apartment.”
Hanoch currently has another situation in which the seller won’t be able to buy something new until he closes because he doesn’t have the 10 percent down payment. Rather than go into a rental and wait to buy, he’s trying to negotiate a post-closing agreement.
“We already have a buyer, but he’s going to want something for this. He’s not going to do it out of the kindness of his heart,” said Hanoch.
Hanoch himself actually stayed for two months in his own apartment at The Chelsea Lane after he’d sold it, paying maintenance and all the costs associated with the apartment while the buyer paid the mortgage. (His buyer had pushed for a quick closing, because he had a lock on his interest rate.)
Shmulewitz said he is currently negotiating another deal in which a couple is selling a combined Upper East Side apartment.
“They’re buying in new construction, which is not ready,” Shmulewitz said. “They built into the sale contract … that they would have the right to stay in half of the combined apartment for [a] limited stated period after the closing.”
Though they can sound like saving graces, most attorneys don’t advocate for these sorts of agreements without very good reason. That’s because there are a host of complicating factors that can arise: What if the seller damages something in the home after the closing? What if they don’t leave when they’re supposed to?
“If a seller decides to hold over, then you have to go to landlord-tenant court to evict them, and the stories are legion about tenants’ ability to stall and delay and cost extra money,” said Bruce Cholst, a partner at the real estate law firm Rosen, Livingston & Cholst.
With his clients, Shmulewitz insists on an escrow account, which can act as a kind of safety net.
“A large escrow has to be held by one of the attorneys to hold back from the seller until the seller actually does vacate,” Shmulewitz said.
Cholst agreed and went even further. “You have to have stringent protective provisions: a penalty for each day beyond the agreed-upon vacate date, and that attorneys’ fees will be borne by the holdover party,” he said.
“The possession agreement has to be drafted very carefully so it’s not riddled with loopholes through which the tenants can wriggle in order to buy more time,” he added. “I issue a thousand caveats when I’m representing a primary buyer.”