Vendor wants to rent back for 6 months

Situation is we are currently renting and found a place that we liked but the vendor wanted to rent back for 6 months.
We are thinking this would cause a lot of headaches/expenses as we would need to maybe hire an RE to take care of the rental contract because what if they break anything during that time.

Is there any benefit of doing this?
Ideally, we want to move in asap to stop paying rent.
We would just look for another place but stock right now is really bad so hoping to hear people's experience with this arrangement.

 

You don’t have to agree.

Or, if you do, you should be able to negotiate a lower price for accommodating their request and saving them inconvenience and expense.

If you do, treat it as any other rental. Once the contract settles, get the PM to do a detailed entry report. Be sure they are thorough, existing furniture can hide marks and stains. The tenant can only be held responsible for damage AFTER settlement, you may have to be able to prove this with dated photos. Otherwise they can claim the damage was there when you bought the property, and it will be up to you to prove otherwise.

As you wish to move as soon as possible, it may be best to stipulate vacant possession in the contract.
Marg

 

You've suggested that you intend to move into the property, but if it was intended to be an investment, consider the following...

I don't know about your local rental market, but for most of my properties, the peak rental season is January/February. The middle of winter is about the worst possible time to rent some of my properties.

Having a hassle free tenant for just 6 months might be ideal for you.

 

I agree totally. They must have been counting on an investor buying this property rather than an owner occupier.

Anyhow, if you go ahead with the vendors request to stay on for 6 months then you need to consult with your solicitor in regard to the purchase contract changes.

And I would suggest not trying to self manage if you end up leasing this property to the vendors...

 

Possible PPOR vs IP tax implications???

 

If I was buying an IP a leaseback would be a bonus.

 

This.

Another option is to agree to a 6m longer settlement which means you wouldn’t need to pay a mortgage on the property during this period till you move in

 

This is what we were thinking but worried that 6month settlement is such a long time and can we be protected if they break anything within that period? We were thinking they might not take care of the property as well as they used to because they know contract has already been unconditional.

Also, we are unsure if it's a good decision seeing that the market is not very good so possibility that price goes down and bank valuation after 6 months is a good amount lower than what we offer today.

 

If you're going to go down this path, I'd want to be confident that finance would be available at settlement. A finance approval today is likely to be reassessed shortly before the actual settlement. You don't want to be left with limited finance options when the time comes.

There's no way of guaranteeing any outcome, but you need to understand if the loan is currently, 'tight', or if there's plenty of buffer against further serviceability changes over the next 6 months. A broker or banker should be able to advise on this.

 

You could consider offering them a 6 month extended settlement instead.

We are currently buying a new PPOR. The vendor has tenants in there and didn't want to kick them out (they are building a house). We didnt want to take on the place as an IP (too many associated expenses like landtax we didn't want), so negotiated to do a longer settlement instead.

 

How long is your extended settlement if you don't mind me asking? And are there any protections for you as to the state of the property? A lot of possible damage could happen in 6 months which we think is very risky.

 

Thanks Peter! We are a bit confident with the loan serviceability and finance security as we are not maxing out and also going with 70-80 LVR. The only thing we worry about is the bank valuation, it might be possible it comes down 100k below our purchase price which is a large chunk to cover shortfall. Also, during the period after contract is unconditional until settlement, if there are structural issues that come out or the house burns down, aren't we still suppose to settle? Pardon the question as we are quite new to the process of buying properties.

 

If you think there’s a good chance of the value going down by $100k in 6 months then don’t buy the property.

 

Ours is going to be a 4mth settlement, with the ability to vary up or down with 4 weeks notice given to us by the vendor.
It is risky, and what works for us may not work for you. We feel pretty confident in our finances, and have options for if circumstances change. We are also pretty confident that prices shouldn't fall (we believe we are paying under current market and actually wanted to lock it in before other buyers realise that). But if prices do fall, then we can tip a little money in, and / or vary our LVR (currently planning on it being under 70%).

Absolute worst case senario, we lose our 10% deposit. And whilst that would absolutely suck and set us back a fair bit, we feel confident enough in our position that we don't think it should be an issue, and if it is, then we aren't going to be homeless or bankrupt or anything. So we feel the risk is worth it for us.

I should also add that we have previously bought two other propertys with extended settlements (12mths and 18mths), so 4 - 6 mths is significantly shorter by that standard. And I almost feel more comfortable with a longer settlement then a typical 4 - 6 week one. Lol.

Definitely don't go in without knowing (and being prepared to take) all the risks first though. I always figure out the worst case senario and ask myself can I live with that, and then what is the probability of it happening. If you cann't live with the worst case senario, its barely even worth looking at the probabilities, you should probably just walk away.

 

Out of curiousity, how do you handle the risk of something happening to the property esp. for 12-18mos settlement (ie. after 18mos, issues arise that werent there before you exchanged contracts). Just thinking they might not take as much care of the property knowing that it isn't their responsibility anymore.

 

To be honest, there isn't a whole lot of protection for the buyer here in ACT against property damages or cleanliness of the property, even in a normal transaction. And I would still have that risk, asking for vacant possession and going a 2 months settlement (they need minimum 8 weeks for an eviction here). So my risk there is about the same anyway. I am still getting vacant possession, and still have to do the pre settlement inspection.

I've met these tenants and seen how they have kept the house for the past several years, and I am not actually concerned about them damaging it. They really do appear to be model tennants. I wouldn't hesitate to put them in any of my properties.

For the other longer settlements, the circumstances were different and I didn't have to worry about tenants. (New builds and the contracts were with developers - one OTP, the other our designs and specifications, but both negotiated with full settlement on completion, unlike most building contracts.)

If you are considering a longer settlement at all, get yourself a good solicitor to do the conveyancing (not just a conveyancor), and get yourself comfortable to read through every single part of the contract several times so you know it inside out, and be prepared to go backwards and forwards to iron out details. Don't just accept conditions because 'that's standard'. Make sure you know what they mean and the consequences of all of them.

To be fair, you really should do all of the above for every contract.

 

I would say that you have more protect against damages if you go an extended settlement qith vacant possession, then if you settle with the vendor still in place and take them on as a tenant. When you settle, you get that property as is. And you cannot see all the faults or flaws when someone is sti living there with all their possessions.

 

Thanks for all the advice.
Just trying to understand if I get this correctly. Do you mean to say that there is more protection from damages if settlement with vacant possession (meaning longer settlement) because you can have presettlement inspection without the vendors stuff? Rather than settling early and agreeing on a rentback because hard to inspect with all their belongings still in place?

Btw, what do you usually look out for during presettlement inspection? I read that they dont have to keep the place immaculate or anything because you are buying it as is? So what does pre settlement inspection accomplish?