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Accidental Landlords and the Law of Unintended Consequences

April 30, 2010 | Rental Trends, Rental Trends and Real Estate News

There’s a story. No, it’s not of a man named Brady, but it is a snapshot of the times and it goes something like this:

It’s winter 2009, the U.S. housing market has crashed and homebuyers are scarce. Homeowners who need or want to sell their homes face a tough decision:  Sell their homes and eat the loss or rent out their homes in an effort to cover the mortgage while riding out the storm.

Unwilling to lock in the loss on their underwater mortgages, many homeowners choose to hold on and find tenants, and the phrase “Accidental Landlord” is coined. For many of these homeowners, just finding a renter is a blessing, but, expecting a long wait for a housing recovering, they get their renters to sign long-term leases.

Fast forward to Spring 2010. The veil of housing price despair is lifting and buyers are emerging from their year-long hibernation. They’re making offers—good offers—offers that sellers actually want to accept. But here’s the rub: A lot of buyers don’t want to buy places with tenants in them. So, what is an Accidental Landlord to do?

As interested buyers return to the housing market, more and more Accidental Landlords could be facing a situation with a willing buyer at the ready and a tenant locked in to a long-term lease. In this situation, renters play an important role in this selling process because property owners must typically receive permission from them in order to show properties to prospective buyers.

Furthermore, tenants who wish to stay in their rental homes naturally would have a conflict of interest with the homeowner and may not cooperate fully throughout the buying process. This could make it difficult for homeowners to present the best picture to potential buyers and sell their homes successfully. At the same time, renters may be feeling a bit on edge, too, if they thought they’d be able to renew their lease and now face eviction.

While some accidental landlords are stuck between a rock and a hard place with reluctant tenants and solid purchase offers on the table, others are sitting back, happy to continue renting out their homes while they wait for a stronger recovery point in their local markets.

But one thing is for sure, we are living in uncertain times, which call for creative and thoughtful solutions. Whether you’re a renter looking at leasing a previously “for-sale” home or an accidental landlord looking for tenants, keep yourself out of an unexpected situation by considering the following tips in your search:

If you’re looking to rent a home from an Accidental Landlord:

  • Consider how long you plan to live in the area. If you will be there for more than a year, think about signing a longer lease or structuring one that gives you renewal rights.
  • Talk to the landlord about their future plans to sell their home. Share your expectations should they want to show their home to prospective buyers and consider adding terms to your lease to protect yourself from any efforts you would consider a major disruption.
  • Consider what you would need and want should you be asked to move out earlier than expected, and negotiate this resolution into your lease. For example, at least three months notice and compensation for moving costs.

If you’re an Accidental Landlord looking for tenants:

  • Consider when you might put your home back up for sale and structure lease terms to match that time frame and give you more control. A shorter lease term with custom provisions particular to your situation will give you the most flexibility to respond to market conditions.
  • Be up front with prospective tenants about your plans to sell in the future and set expectations for what that could potentially require of them. Having their understanding and agreement up front will benefit you much more in the long term.
  • Consider how you might be willing to compensate tenants should you request that they move out earlier than they expected.

As in most situations, being honest and upfront about your renting/selling needs can go a long way toward avoiding headaches down the road. Tell us—are you seeing any signs of a homebuyer re-emergence in your area?

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