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Rent Back Agreement.

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Frederick R. Ruffell

Senior Member
Joined
Jan 21, 2002
Professional Status
Certified General Appraiser
State
California
I am currently appraising a property that is under contract for sale, very straight forward with lots of sales data, property is in excellent condition. Upon reviewing the sales contract I noted that there is a rent back option for the seller. No details were given in the sales contract.
How does one go about placing a value on such an agreement. Lets assume that the rent will be $1,000 per month for 6 months?
 

Mike Garrett RAA

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Jan 14, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
Why do you need to value it?
 

Frederick R. Ruffell

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Joined
Jan 21, 2002
Professional Status
Certified General Appraiser
State
California
Mike, I would think (in this very tight market) that not having access to your $500,000+ house (this is not an investor deal) might affect the purchase price? Furthermore if the property is encumbered with a lease, am I able to say I have appraised the fee simple estate without using a Hypothetical (i.e no lease agreement)?
 

Mike Garrett RAA

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Jan 14, 2002
Professional Status
Certified Residential Appraiser
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Colorado
There is no lease now and won't be one until title transfers. Appraise it as if it was a straight sale. The fact that the buyer is willing to let the seller remain in the property for say 6 months could be considered a sales concession if the rent was below market but that is not an issue at this point.

If I sold you my car and you decided to let me drive it would that affect the value of the car at the time I sold it?
 

Walter Kirk

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Jun 24, 2003
Professional Status
Licensed Appraiser
State
New Jersey
The lease back agreement probably won't have any effect on the value of the subject however it may kill the deal if the buyer is obtaining a mortgage as an owner occupant.
 

Fred

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Jan 15, 2002
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Retired Appraiser
State
Virgin Islands
Frederick,
You never told Mike why the property is being appraised and for whom, to establish value for the sale participants, for a third-party lender, etc. That would determine how you handle the pending encumbrance to title.

Posted by Mike
If I sold you my car and you decided to let me drive it would that affect the value of the car at the time I sold it?
Absolutely. Why would a person of sound mind, like Frederick, pay the same amount for a turnkey car he can drive off with right now as he would for a car entangled in a contractual deal that has him waiting months for you to finish driving around (assuming you don’t total it during the delay period)?

This seems like a basic property rights concept. The right to use is the biggest stick in the bundle. Your car free-and-clear or your car subject to encumberances is not the same car. So too with houses.
 

xm39hnu

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Jul 10, 2003
Professional Status
General Public
State
Florida
Frederick,
Someone else posed a similar problem in another thread, i.e., house was being sold with six months remaining on an existing lease. It was suggested that the occupant might be persuaded to move by offering him, say, $1,000 cash, and that such an amount could be the cost to cure that encumbrance.

Maybe that would work for you. What would the option holder take to give up the option? Think it'd work?
 

Mike Garrett RAA

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Jan 14, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
Steven could be right...but then again, he might not. What he is saying about not having enough information is certainly right. I made a couple assumptions I probably shouldn't have.

It is quite common in my market to do lease backs. I was thinking of my own situation last year. I needed to sell my condo in order to purchase my new home. An investor purchased the property and was more than willing to let me lease back until my new home was ready for occupancy. There was no discounting at all. We closed at the end of October and remained in the unit until February the following year. He was even agreeable to rent back to us at his mortgage payment (piti). He didn't have to pay a lease up fee or property management during that period of time. It also gave him time to be selective in finding a tenant himself.

I recently appraised a single family residence that had a lease back under similar conditions. It sold for full price, no discounting. The new owners did not want possession for several months so it was fine with them to have the sellers remain in the property. This was not an investor purchase.

To the best of my knowledge I have never seen an appraiser discount a single family residence because of a lease back clause in the contract. Doesn't mean it doesn't or can't happen...just that it isn't common in this market.

What is the IRS reaction to this??? Seems to me if it is less than one year it is considered a condition of sale and the property is not considered an investment property. Under VA, and I believe FHA, the purchaser must state an intent to occupy as a primary residence. My VA appraisal manual doesn't say anything about it, nothing in the 4105 (FHA), and nothing in my Fannie Mae "underwriting the property" book.

Intent....what is the intent of the parties to the transaction? Also, how would you value such an arrangement? I honestly don't know.
 

Frederick R. Ruffell

Senior Member
Joined
Jan 21, 2002
Professional Status
Certified General Appraiser
State
California
The appraisal was ordered by the lender. The key word here is "option". There is no current lease or rental agreement, so it really did not affect the value, nor the purchase price or so it seems. I disclosed the option in the report and will let the underwriter handle it. Once again Mike had it correct.
 
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