When Home Sellers Stay on as Tenants

Jeff and Nicole Hanson's home in Oakland, CA | Alanna Hale for The Wall Street Journal

When Rosemarie Roussel sold her one-bedroom co-op in Midtown Manhattan in late 2015, she also lined up a great deal on her next home: the same apartment.

Mrs. Roussel, 82, a retired fashion designer, sold her roughly 675-square-foot unit in October 2015 to her next-door neighbors for $585,000—$36,000 above asking price, plus a special request. She would stay on as a tenant, paying a below-market rent of $2,800 a month, while she pondered her next move—perhaps a return to her native France. The new owners, who plan to combine the apartments, get some income while they wait. They’re in talks to renew the lease, and Mrs. Roussel might stay another year, or longer.

“It was a really friendly arrangement,” says Mrs. Roussel, who shares cookies with the new owners’ children. Listing agent Laurie Kraus with Corcoran says the lease helped seal the deal: There were seven offers on the Art Deco-style apartment, all over asking price.

In luxury real estate, sometimes closing is just the beginning. The practice of sellers renting back their home after the sale is picking up in a number of high-end markets, agents say, in part because tight housing supply gives sellers the edge in negotiations. Even as some markets soften, these arrangements can help the buyer defray maintenance costs on a home that might otherwise sit vacant. It can also mean more time for the seller to figure out their next move. But suddenly becoming a landlord or tenant can carry its own baggage.

Retired fashion designer Rosemarie Roussel, 82, in her Midtown Manhattan co-op apartment. Mrs. Roussel sold the apartment in 2015 for $585,000, with the agreement that she may remain as a tenant.

Dorothy Hong for The Wall Street Journal

One notable example occurred in June, when Daren Metropoulos, the 33-year-old co-owner of Hostess Brands, including the snack cake Twinkies, bought the Playboy Mansion in Los Angeles for $100 million, with Playboy founder Hugh Hefner included. A spokesperson for Mr. Metropoulos said the deal was contingent on letting Mr. Hefner, 90, remain as a lifetime tenant, at a rate of $1 million a year. Mr. Metropoulos, who lives next door, has said he would ultimately combine the two estates.

Other deals fall into place. In 2010, developer Mohamed Hadid sold his home, Le Belvedere, a roughly 40,000-square-foot stone-clad château in Los Angeles, for $50 million, county records show. Mr. Hadid, who is the father of fashion models Gigi and Bella Hadid, was living there at the time and knew he would need around six months to move out of the spread, which includes 10 bedrooms, a ballroom and a Turkish hammam. But as he prepared to pack, he said he sold the next home that he planned to move into.

“Six months became a year, a year became two,” said Mr. Hadid, who has now been renting back the mansion for about six years. He says he has never met the buyers, two Asian investors, but approached their representative with a plan: He would cover maintenance costs and pay rent, which he wouldn’t disclose, to reside there until the buyers decided to move in. It was appealing to Mr. Hadid, because he got to put off the arduous moving process, and appealing to the buyers, because they had no immediate plans to move in and carrying costs on a mansion of this size can run into the millions. Taxes alone last year were $647,221, records show. The buyers never moved in (Mr. Hadid says they had other properties in the area).

Stacy Gottula with The Agency, who is co-listing Le Belvedere for $85 million, says these lease-back agreements are common in the ultraluxury market, because they offer the seller peace of mind. Sometimes the cost of moving out of a palatial home can exceed the buyer’s cash deposit, she said. If the deal falls through, the seller could lose time and money from a premature move. A rent-back agreement gives the seller more breathing room, to ensure the deal goes off without a hitch.

The arrangement can create complications. While damage deposits are often negotiated, major disasters fall to the new owner and her insurance policy, says attorney Adam C. Wilner, a partner with Greenberg and Wilner in New York. (The renter typically insures her own possessions.) In sales that involve financing, renting the property for too long can jeopardize the lender terms, he adds.

Attorney David Deckelbaum of Settlementcorp in Washington, D.C., says such deals should be called license agreements, not leases, because tenant-landlord rules are messier. A post-possession agreement lasting more than 60 days makes it much harder to evict the former homeowner, if things should go awry, because the district has strong tenants’ rights laws, he says. Rules vary in other markets.

Sometimes there is no way around it. Nicole Hanson, 39, a financial planner, and her husband, Jeff, a chemist, paid $1.185 million in July for a four-bedroom home in Oakland, Calif., or almost 20% over asking price. They also agreed to let the seller stay in the home, rent free, for three weeks after closing—an increasingly common sweetener, says the buyer’s agent, Judy Richardson of Red Oak Realty.

The rent-back was necessary because the sellers made a similar arrangement on their new home purchase in Seattle, another hot market. “It was a cascading series of events,” says Sasha Waring, 35, a psychiatrist who was moving so he and his wife Avantika, an endocrinologist, could be closer to new jobs. To wit: no one could move in unless everyone moved out on time.

“It was a real nail biter,” says Ms. Hanson, who ended up moving in the same day that Mr. Waring’s family was moving out. Mr. Waring’s moving truck had broken down the night before, and there was a scramble to get back on schedule. “Any small delay could derail a closing,” says Ms. Richardson, but everyone came through.

Ms. Hanson, a financial planner, and her husband, Jeff, a chemist, with their children in the home.

Alanna Hale for The Wall Street Journal

Other deals are born of intuition. Judi Katzen, 71, who owns a unit in La Tour, a Miami Beach tower, knew her neighbor had been trying to sell his two bedroom since November 2015 for $999,000, most recently for $919,000. “I felt that he didn’t really want to leave yet,” says Mrs. Katzen.

The seller, attorney James Whitlow, 49, concurs: “I love the building,” he says, and if he couldn’t get the right offer, he wasn’t in a rush to sell. So Mrs. Katzen devised a deal where she and her husband, Barry, would buy the apartment for $810,000 in exchange for two one-year lease agreements starting at $2,500 a month ($1,000 less than market value), and they would also cover the agent’s commission. They closed at that price in January, says Michele Redlich with Coldwell Banker, who brokered the deal. Mrs. Katzen plans to combine the apartments and make the space their full-time residence.

“Nothing has changed,” says Mr. Whitlow, about becoming a renter in his home. That is a relief for his wife, Doris Maya, who says living in an apartment for sale made her feel transient. She also felt unsure about whether to redecorate the space. Finding out they can stay for at least two more years changed all that, she says.

Her new couches arrived last Friday.

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