Rent-Back Agreements: Pros And Cons For Buyers And Sellers
May 02, 2023 6-minute read
Author: Miranda Crace
Buyers often agree to give the sellers a week to 10 days after closing to pack up and move out completely. However, you don’t necessarily have to leave your “old house” even this quickly.
Instead, you may be able to enter into a rent-back agreement with the buyer of your house, allowing you to pay rent to stay in your sold home while you prepare to move.
Rent-back agreements provide benefits to both buyers and sellers. Let’s learn more about real estate rent-back agreements and dive into the details of how they work.
What Is A Rent-Back Agreement?
A rent-back agreement is a rental or lease agreement between the home buyer and seller that allows the seller to take out their home equity and continue to live in the house after the closing date in exchange for rental payments.
This arrangement, also sometimes called a “sale and rent back,” “sale-leaseback” or a “post-settlement occupancy agreement,” is usually a short-term deal rather than a long-term one. It often occurs when the seller experiences a delay in finding or moving into a new home.
Check out a few examples of when a rent-back agreement might occur:
- Example 1: You’re building a new home and your contractor announces they can’t get enough workers to finish your home’s construction on time. 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 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.
- Example 3: You, the seller, receive an offer on your current home, but you haven’t had time in your schedule to work with a real estate agent and find a new home to purchase. In this situation, you might want to tap into a rent-back agreement so you can take your time searching for the perfect home and making an offer.
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How Does A Rent-Back Agreement Work?
Buyers should never let sellers remain in the home without 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 draw up a rent-back agreement using the following process:
Consult With An Attorney And Notify The Lender
A real estate attorney can help both parties navigate some potential issues they could face during the leaseback period, such as who pays insurance. An attorney will mention other necessary precautions to protect those involved.
Lenders will usually approve a short rent-back. However, anything longer than 60 days could violate loan documentation stating that the property will be owner-occupied by a certain date.
Both Parties Sign The Rent-Back Agreement
This legally binding document includes details such as the seller’s rent and the length of time after closing that the seller can remain in the home. The rent-back agreement also includes the security deposit amount and additional insurance coverage or fees.
Buyers and sellers can check out comparable homes for rent nearby in order to land on a fair rental amount. If a seller only needs to stay in the home for a matter of days, consider dividing the market rate by 30 to arrive at the daily rate.
A standard rent-back agreement will likely include the following guidelines and provisions:
- Rental rate: A rent-back agreement should identify how much rent the former owner will be charged per day or 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 state what will happen if property damage occurs.
- Insurance coverage: The buyer will likely have homeowners insurance by the closing date, but the seller should maintain coverage for personal property.
Use A 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 SIP form addresses similar provisions to the regular rent-back agreement, such as the monthly rental rate, the security deposit, agreement length, and the utility and home maintenance responsibilities.
Is A Real Estate Rent-Back Agreement A Good Idea?
A seller rent-back agreement can have distinct advantages for both the buyer and the seller. However, you’ll want to carefully consider the unique circumstances of your situation before deciding if a rent-back is a good idea for you. Let’s look at the benefits of rent-back agreements.
Rent-Back Benefits For Sellers
For you, the seller, the potential benefits of entering into a rent-back agreement go like this:
- You have more time to find your dream home. A rent-back agreement will give you as much time to extend your home search as a buyer is willing to
- It allows you to avoid moving more times than necessary. You can avoid living in temporary housing or being forced to rent a storage unit to house your furniture.
- It will help spare or limit your stress. Since you won’t have to move immediately after selling your house, you’ll save yourself the stress of rushing through the process.
Rent-Back Benefits For Buyers
A home buyer, meanwhile, can also enjoy some benefits with a rent-back agreement. They include:
- Earning rental income at the current market rate: If you’re a buyer, the extra income can offset your mortgage payments and some closing costs, appraisal fees and attorney fees.
- Making 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.
In hot real estate markets, it’s essential to make an appealing offer. A rent-back agreement can help a buyer sweeten the deal for a seller, but it’s important not to overlook other key considerations like demonstrating strong financial backing. When you apply for a loan with Rocket Mortgage®, you’ll have the option to provide extra documentation to get a Verified Approval. This higher level of financial scrutiny might help a buyer catch a seller’s attention.
Is A Rent-Back Agreement Risky?
A rent-back agreement has some potential drawbacks for both buyers and sellers. Up next are a few risks to consider before entering into a rent-back agreement.
Rent-Back Risks For Sellers
The risks of rent-back agreements for sellers largely center around being tenants in their own home. Sellers may deal with the following upon entering a rental arrangement with the buyer:
- A more expensive monthly rental payment: It’s possible for a monthly rental payment through a rent-back agreement to end up costing more than what you, as the seller, paid month-to-month on your mortgage for the same property.
- The inability to make permanent changes: Sellers can’t make permanent changes to the property during the rent-back period.
- A risk of losing your 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 also face several risks, such as:
- Landlord responsibilities: Buyers end up collecting rent, putting together a lease, collecting a security deposit and possibly 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 place. If you’re the buyer, you may have to wait weeks or even months to move in.
- A possibility that tenants can get evicted: Renters, including recent sellers living in a home under a rent-back agreement, don’t always move out when they should or pay rent when it’s due. Evicting the seller can become a complicated, time-consuming process, especially if an eviction moratorium occurs, preventing landlords from removing renters from their homes for not paying rent.
The Bottom Line: A Rent-Back Agreement May Benefit Or Hurt Both Parties In A Home Sale
It’s wise to consider your personal and financial situation before deciding whether a rent-back agreement is right for you. To put a rent-back contract in place, talk with 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, insurance coverage, and utility and home maintenance responsibilities.
Ready to begin looking at new homes? Contact a Home Loan Expert to start the initial approval process before embarking on your search. You can also give us a call at (833) 326-6018. This way, you can make an offer on your dream home as soon as you find it.
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