Rent-Back Agreements: Pros And Cons For Buyers And Sellers
Melissa Brock6-minute read
September 16, 2021
Buyers often agree to give the sellers a week to 10 days after closing to completely pack up and move out. However, did you know you don't necessarily have to move out of a home you sell right away?
When you sell your home before buying a new one, you’re no longer on the hook for paying two mortgages at once. This means you don’t have to feel rushed into making a housing decision. If you have somewhere to stay after closing, you can also take your time and make sure your next home purchase is the right one.
You may also consider entering into a rent-back agreement with the buyer of your house, which would allow you to pay rent to stay in your sold home while you search for a new one (or offer you more time if you need more for another reason).
Rent-back agreements offer benefits to both buyers and sellers. Let's learn more details about real estate rent-back agreements and dive into the details of how they work.
What Is A Rent-Back Agreement?
A rent-back is a rental agreement between the home buyer and seller that allows the seller to continue to live in the home after the closing date in exchange for rental payments. The arrangement, also sometimes called a “sale and rent back” or a “post-settlement occupancy agreement," is usually temporary. It usually occurs when the seller experiences a delay in finding or moving into a new home.
Let's go over a few examples of when a rent-back agreement might occur. Take a look at these samples:
- Example 1: You're building a new home and your contractor announces that he can't get enough workers to help him finish your home's construction. Due to this construction delay, you might need extended time in your original home – that is, the home you planned to sell.
- Example 2: You, the seller, receive an offer on your current home, but you have not had time in your schedule to find a new home to purchase. In this situation, you might want to tap into a rent-back agreement.
- Example 3: You have several school-aged children who would benefit from finishing out the year at their current school district. A rent-back agreement can give you extra time to let that learning continue.
Is A Rent-Back Agreement A Good Idea?
A rent-back agreement can have distinct advantages for both the buyer and the seller. You will want to carefully consider the unique circumstances of your situation before deciding if a rent-back is a good idea for you. Let's go over the benefits of rent-back agreements.
Rent-Back Benefits For Sellers
The potential benefits for a seller entering into a rent-back agreement include the following:
- More time to find your dream home. A rent-back agreement will give you as much time as a buyer is willing to give you to stay in the home.
- Avoid moving more times than necessary. You can avoid having to live in temporary housing or being forced to rent storage unit rentals.
- Accept an attractive offer within a short, close timeline. Once the right house comes along, you can move in fairly quickly.
Rent-Back Benefits For Buyers
Buyers can also experience the following benefits with a rent-back agreement:
- It may make an offer more attractive. The seller may need somewhere to live for a month or so, and if a buyer can offer to let them live in the home, it might be just what tips the scales in the buyer's direction. It might help make the offer on the home more attractive to the seller.
A buyer can earn rental income at the current market rate. The extra income can offset not only your mortgage payments but also some closing costs, appraisal fees, and attorney fees.
Is A Rent-Back Risky?
A rent-back agreement can have some potential drawbacks for both buyers and sellers. Let's take a look at a few potential risks to consider prior to entering into a rent-back agreement.
Rent-Back Risks For Sellers
First, let's take a look at the potential risks for sellers, including:
More expensive monthly rental payment: It's possible that a monthly rental payment through a rent-back agreement could end up costing more money than what you paid month-to-month on your mortgage for the same property.
- Permanent changes: Sellers would not be able to make permanent changes to the property, during the rent-back period.
- Lost security deposit: You'll lose your security deposit if damage occurs to the property while you live there during the rent-back period.
Rent-Back Risks For Buyers
Buyers entering into a rent-back agreement can face several risks as well, including:
- Landlord responsibilities: Buyers end up having to collect rent, putting together a lease, collecting a security deposit and even evicting a tenant if necessary – all part of being a landlord. Buyers may never have wanted these responsibilities originally.
- Delayed move-in schedules: Buyers can't move in upon closing when a rent-back agreement is in full force. They delay becoming new owners by weeks or even months.
- Possible eviction of tenants: Renters don't always move out when they should or pay rent when it's due. That could become a problem with a seller as well. Evicting the seller can become a complicated, time-consuming process, especially if an eviction moratorium occurs. (This prevents landlords from removing renters from their homes for not paying rent.)
How Does A Rent-Back Agreement Work?
Buyers should never let sellers remain in the home without signing a formal agreement. These agreements spell out the terms and conditions of the seller's occupancy and protect both the buyer and the seller.
A seller and buyer might go about obtaining a rent-back agreement using the following process:
Step 1: Consult with an attorney and notify the lender.
An attorney with expertise in real estate law can help both parties navigate potential issues each could face during the rent-back period, such as who pays insurance. An attorney will bring up other necessary precautions to protect those involved.
Lenders will usually OK a short rent-back. Anything longer than 60 days could violate loan documentation that states that the property will be owner-occupied by a certain date.
Step 2: Both parties sign the rent-back agreement.
This legally binding document includes details such as the seller's rent, the length of time after closing the seller can remain in the home as well as the addition of a security deposit, additional insurance coverage or fees.
Buyers and sellers can check out comparable homes for rent in the area to land on a fair rental amount. If a seller only needs to stay in the house for a matter of days, consider dividing the market rate by 30 to arrive at the daily rate.
A sample rent-back agreement may include the following guidelines and provisions:
- Monthly rental rate: A rent-back agreement should identify how much rent will be charged per day or per month.
- Security deposit: The agreement should cover the amount of the security deposit and whether the security deposit will be held in escrow or released to the buyer.
- Length of the agreement: The rent-back agreement should clearly spell out the length of the seller's time in the house.
- Utility payment responsibilities: Either the buyer or the seller might pay for utilities, but the rent-back agreement should clearly outline who must pay for them.
- Home maintenance responsibilities: If the front door gets damaged, for example, who will pay for it? The rent-back agreement should spell out what will happen in instances such as this.
- Insurance coverage: The buyer will likely have homeowners insurance by the closing date, but the seller should maintain coverage for personal property.
Seller In Possession (SIP) Form
You may use a seller in possession (SIP) form in lieu of a traditional rental agreement for rent-backs that last 30 days or less. The forms also address similar provisions in regular rent-back agreements, such as the monthly rental rate, the security deposit, agreement length, utility and home maintenance responsibilities and more.
The Bottom Line: A Rent-Back Agreement May Benefit Both Parties In A Home Sale
Consider your own personal and financial situation before deciding if a rent-back agreement is right for you. However, as the seller, renting your sold home can give you ample benefits, though it can offer drawbacks as well. Buyers can also find drawbacks and benefits to this arrangement.
To put a rent-back agreement in place, talk to an attorney and your lender. Both parties can then sign the agreement, which should include the monthly rental rate, security deposit, length of the agreement, utility and home maintenance responsibilities and insurance coverage.
You may also choose to use a seller in possession form instead of a formal rent-back agreement.
Speak with a Home Loan Expert if you have questions about rent-back agreements or other aspects of buying a home.
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