Rent-back agreements: Pros and cons for buyers and sellers

A rent-back contract is a temporary lease arrangement that lets home sellers stay in the home and rent it from the buyer after the sale closes. While this type of arrangement can be advantageous for both parties, it also comes with some risks.

Understanding how rent-back contracts work and when they’re appropriate can help you decide if this type of agreement is right for your situation. But remember, this article provides only a brief overview. For professional guidance, it’s best to consult with a real estate attorney about your specific situation.

What is a rent-back agreement?

A rent-back agreement is a temporary lease agreement between a home seller and home buyer that allows the home seller to rent the property from the buyer after the closing date.

Sometimes called a “sale and rent back,” “sale-leaseback” or a “post-settlement occupancy agreement,” a rent-back agreement is usually a short-term deal often used when a seller encounters a delay in finding or moving into a new home.

Under certain market conditions or unique situations, some agreements can extend for weeks or months, such as:

• Example 1: You’re building a new home, and your contractor informs you that they’re experiencing a labor shortage and don’t have enough workers to finish construction on time. Because of the construction delay, you would likely need more time at your property.
• Example 2: You have several school-aged children, and you want them to finish out the year at their school. A rent-back agreement can give you the extra time to keep them in their current school until you move.
• Example 3: You’ve received an offer on your home but haven’t made time to work with a real estate agent and find a new home to purchase. A rent-back agreement can give you extra time to find a new place to live.

How does a rent-back agreement work?

Also called a “sale and rent back,” “sale-leaseback,” or “post-settlement occupancy agreement,” a rent-back agreement is typically a short-term lease arrangement between the buyer and seller.

Here’s how it works: If the seller knows they may need extra time in the home after closing, they can ask the buyer to agree to a rent-back contract as part of the sale. This can even be added as a contingency in the offer. If the buyer agrees, both parties negotiate the terms—such as the rental rate, who’s responsible for what during the rent-back period (for example: utilities, repairs, and maintenance), the move-out date, and the length of stay. Both parties will then sign the agreement at closing.

For example, let’s say a couple sells their home, and the deal closes on May 15. Their new home won’t be ready until mid-July. Adding a rent-back agreement gives them time to stay in the house and pay rent to the buyer for two more months until they’re ready to move. This way, they don’t have to move twice—once to temporary housing and again to their new home.

Keep in mind, sellers usually can’t stay in the home more than 60 days after closing—but rules can vary by state. Lenders typically expect the buyer to move in and live there. If the seller doesn’t move out in time, the buyer may need to refinance under an investment loan, which may come with a higher interest rate and new terms.

Consult an attorney and notify the lender

Even though rent-back agreements seem straightforward at first, it’s a good idea to bring in a real estate attorney. They can help make sure both the buyer’s and seller’s best interests are accounted for and make sure everything is clearly outlined to avoid problems later on.

The attorney’s main role is to ensure the agreement clearly spells out each party’s responsibilities – like who pays the utilities, handles repairs, and manages upkeep during the rental period. Since the seller is living in a home they no longer own, it’s important to set expectations in advance, similar to how you would with a new rental agreement.

This is where an attorney can help define the terms so both sides are on the same page. They can also help point out and address any potential risks. For example, what happens if the seller doesn’t move out on time or damages the property? They’ll draft the rent-back agreement to include clear expectations and legal options in case something goes wrong.

Both parties need to sign the rent-back agreement

All the details of the rent-back contract need to be worked out before the home sale is final. This includes things like how much rent the seller will pay. To figure out a fair amount, it’s a good idea to look at what similar homes in the area are renting for. That way, the price makes sense and matches the current market.

In some cases, the seller may only stay for a short time – like a few weeks. In that case, the rent can be prorated. For example, if the fair monthly rent is $1,500, divide that by 30 (or 31, depending on the month) to get a daily rate of $50. If the seller stays for 20 days, they would pay $1,000 in rent (20 x $50).

Here are some standard terms typically included in a contract:

• Rental rate: The monthly amount the seller will pay to rent the property.
• Security deposit: Whether one is required, how much it is, and if it will be held in an escrow account or paid directly to the buyer.
• Duration: The start and end dates of the seller’s stay.
• Utilities: If the buyer or seller pays for services like electricity, gas, water, and internet.
• Home maintenance: If the seller is responsible for any repairs or damages that occur during the rental period.
• Insurance or fees: Buyers often cover homeowners insurance, so sellers may need to purchase renters insurance during the rent-back period.

Use a seller in possession form (SIP)

Sometimes, the seller only needs to stay in the home for a short time – less than 30 days. In that case, a Seller in Possession (SIP) agreement may be a better fit. A SIP is a short-term agreement often included in the closing documents. It’s a straightforward solution that can work well when the seller needs just a few extra days or weeks.

Even though it’s shorter, an SIP should still cover the same terms as a rent-back contract. That includes the rental amount (or daily rate), how long the seller can stay, who pays for utilities, and what happens if they don’t move out on time.

Remember that putting everything in writing helps both parties stay on the same page and avoid confusion down the road.

Benefits of entering a rent-back agreement

A rent-back agreement can be a win-win solution for both the buyer and seller. Whether the seller wants to stay in the home until their children finish the school year or the buyer is flexible with their move-in date, this setup can help streamline the transition for everyone involved.

Here are a few ways both sides can benefit.

For sellers

Sellers can benefit from a rent-back agreement by:

• Getting extra time to find their next home: They don’t have to rush into buying or settling for a home that doesn’t fit their needs.
• Avoiding the hassle of moving twice: Staying in the home a bit longer helps sellers skip the stress and expense of temporary housing.
• Making the move more manageable: The extra time allows the seller to have more time to plan and pack without the pressure of feeling rushed.

For buyers

Buyers can benefit from a rent-back agreement by:

• Earning rental income. Charging the seller rent can help offset some housing expenses like your mortgage payment, appraisal fees, or closing costs.
• Strengthening their offer. Including a rent-back period in the offer shows flexibility and may make the offer more attractive – especially in a competitive market.

Is a rent-back agreement risky?

Like any type of property contract or contingency, a rent-back agreement doesn’t come without its risks. While it can offer flexibility, there are potential downsides both buyers and sellers should consider when entering into an agreement.

Here are a few downsides both parties should be aware of.

Rent-back risks for sellers

A few rent-back risks sellers should keep in mind:

• Higher housing costs: Your rent during the rent-back period might be more than your old mortgage payment.
• Less control over the home: Once the sale is final, you no longer own the property. That means you won’t be able to make any changes or updates.
• Risk of losing your deposit: If you damage the home while you’re still living there, you could potentially lose some or all of your security deposit.

For buyers

A few rent-back risks buyers should keep in mind:

• You take on landlord duties: Once the agreement kicks in, the buyer becomes the landlord. That means you'll need to collect rent, handle the security deposit, and possibly deal with issues if something goes wrong.
• You may have to delay your move-in: You won’t get the keys right away. Depending on the terms, you could be waiting weeks—or even longer—to move in.
• There’s a chance you’ll face eviction issues: If the seller doesn’t move out on time or stops paying rent, you might have to start the eviction process, which can be stressful, costly, and time-consuming. Plus, if the seller stays past 60 days, your mortgage lender may consider the property a rental, which could impact your interest rate and loan terms.

FAQ

You probably still have questions about rent-back agreements. Let’s answer some common ones.

Can rent-back agreements be negotiated?

Yes, the terms of a rent-back agreement are negotiable. Both parties can agree on details such as the rent-back duration, rental amount, security deposit terms, who covers maintenance and utilities, and other important provisions.

What happens when a rent-back agreement ends?

Like other lease agreements, the seller must move out once the rent-back period ends, as outlined in the contract. If the seller doesn’t move out or fails to pay rent, the buyer may need to begin the eviction process.

How common are rent-back agreements in real estate?

Rent-back agreements are commonly used in competitive housing markets and are growing in popularity. Whether one is used often depends on local market conditions (such as whether it’s a buyer’s or seller’s market) and the specific needs of the buyer and seller.

What are the tax implications of rent-back agreements?

If you're the buyer, rent you collect from the seller is typically considered taxable income and should be reported to the IRS. Sellers usually can’t deduct rent payments, since it’s considered personal housing rather than a business expense. A tax professional can help you understand how the agreement may impact your specific situation.

How much do people charge for rent-backs?

Rent-back rates are usually based on the fair market rental value of similar homes in the area. To figure out a fair price, it's best to compare what nearby, comparable properties are currently renting for. This helps make sure the rate is reasonable for both the buyer and the seller.

The bottom line: A rent-back agreement can benefit buyers and sellers

A rent-back agreement can make sense in certain situations – like when a buyer wants to strengthen their offer in a competitive market or when a seller needs a little extra time to get things in order after closing. But this type of contract also comes with risks for both sides, such as the seller not moving out on time or causing damage that leads to a lost security deposit. That’s why it’s important to understand how rent-back agreements work and to talk with a real estate attorney to decide if it’s the right move for you.

Ready to take the next step? Whether you're buying or selling, Rocket Mortgage is here to help. Start your mortgage approval online, give us a call at (833) 326-6018.

 

*Clients who are current renters will receive a lender credit toward closing equivalent to 10% of the total amount of their 12-month rental payment, up to $5,000. Current renters are defined as individuals who are currently under a lease agreement. Offer only valid on primary residences. Offer valid only through retail channels and on loans that are locked on or after February 11, 2025. Offer not available for Non-Occupant Co-Clients. Offer not available for partnerships. Offer not valid on Jumbo loans, Schwab products or previously locked or closed loans. Offer is nontransferable. Offer is not valid with any other discounts or promotions. Additional restrictions/conditions apply. Rocket Mortgage reserves the right to modify/cancel this offer at any time. This is not a commitment to lend.