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Understanding Leasebacks

Leaseback Arrangements

In a leaseback arrangement, the buyer allows the seller to stay in the property after closing through a specified date. The seller may need more time to find their next home or have other reasons they want to stay there after closing, and the leaseback arrangement allows them to do that. The Multi-Board contract outlines the leaseback arrangement under optional paragraph 35, “Possession After Closing.” 

Payment for Possession

The buyer can choose to charge the sellers to stay in the property. In most leaseback arrangements, this is a daily rate referred to as PITIA: principal, interest, taxes, insurance, and association dues. In other words, the seller covers the buyer’s mortgage and related expenses for the days they possess the property. The attorneys will usually determine the PITIA by consulting with the Buyer’s lender to confirm the anticipated monthly mortgage payment, dividing this by 30, and then adding in the daily costs for taxes, insurance, and association dues.  Then, the attorneys will collaborate to draft a comprehensive post-closing possession agreement, a separate agreement that the buyer & seller sign at closing, that expands on the original language in paragraph 35 of the contract and memorializes the key terms of the possession. 

The buyer can also choose to offer a rent-free leaseback, allowing the seller to stay in the property for free. 

The seller will escrow funds to cover their PITIA and any potential damages that may arise. These funds are usually held by one of the attorneys in a trust account, or by the title company. The buyer will receive the funds they take possession of the property, and the seller will receive any remaining funds. 

Vacating the Property

If the seller fails to vacate the property by 11:59 p.m. on the agreed-upon date, there is typically a penalty to the seller. The default penalty outlined in the Multi-Board contract is that the PITIA rate is tripled. 

In a typical leaseback agreement, the seller can provide the buyer with possession sooner than the Possession Date. In that case, they would only be responsible for the PITIA for the days they possessed the property. 

Utilities & Other Expenses During the Leaseback

During the leaseback period, the seller is responsible for utilities & any home maintenance expenses that arise. The buyer is responsible for paying everything PITIA encompasses: principal, interest, taxes, insurance, and association dues (if applicable). 

Post-Possession Final Walkthrough

In a leaseback scenario, the buyer will still do a final walkthrough before closing. They will check that the property is in the same condition as the last time they saw it, but the seller will not be moved out yet. The buyer will do a second final walkthrough before taking possession of the property, and this is when they will ensure the seller has moved out, the property is in broom-clean condition, and there are no new issues in the home. 

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