If you’ve ever purchased or sold a home, you know that timing doesn’t always go according to plan. You either find your dream house before your current house has been sold, or your house sells before you’ve found somewhere else to live. Dealing with this reality can be overwhelming as both the buyer and the seller. Using a rent-back agreement can help bridge the gap in the examples above.
What is a rent-back agreement?
A rent-back agreement is when the buyer lets the seller stay in their home for a certain amount of time after closing. This usually happens when the seller hasn’t found a place to live yet and needs more time before officially moving out of their old home. As the seller, requesting a rent-back helps avoid the headache of having to move twice. Sellers often use a real estate professional to help draft the rent-back agreement. This will help ensure that all of your bases are covered and potentially expedite the time it takes to arrive at a fair agreement.
How does rent-back work?
A rent-back agreement may or may not be premeditated. Knowing they won’t close on a home in time, the seller may make the sale contingent on a buyer, agreeing to a rent-back. If a seller realizes they’ll need extra time during the sale, they can make the request any time before closing.
The details of the rent-back agreement should be disclosed in a document signed by the buyer and seller. This may be in the form of a lease agreement or written into a designated closing document. The agreement will include the length of time, how much the seller will be charged and any other information that will help determine who is responsible for what during their stay. For example, if something breaks — will the seller (current owner), or the buyer, be responsible for remedying this?
How long can a rent-back agreement last?
A rent-back agreement can last anywhere from just a few days or up to 60 days. It’s unlikely a lender accepts a rent-back agreement that exceeds 60 days for two reasons. First, the seller's insurance company limits how long they’re willing to extend their services since technically it is no longer the seller’s home to insure. Second, the buyer's timeline must be considered, and they can’t wait forever to move into their new home. Also, depending on the length of the agreement or the total rent received, some lenders may classify the buyer's purchase as an investment property and not a primary residence.
How much does rent-back cost?
The buyer decides how much they will be charging based on their principal, interest, taxes and insurance. The buyer can also reference comparable houses for rent to help determine what’s fair. Most people charge per day.
If the rent-back agreement is only for a couple of days, the buyer may agree to let the seller stay for free. No matter the length of stay, however, the details of the rent-back agreement should be put in writing.
What happens when a rent-back agreement ends
Once the agreement is drafted to both the buyer and seller's standards and they are ready to close, they can begin the rent-back period. Once the rent-back period ends, the seller is expected to move out so the buyer can officially move in. If the seller does not move out on time, the buyer, just like a landlord, has the right to evict.
Advantages of a rent-back agreement
There are advantages for both the buyer and seller in a rent-back agreement. It will help the seller avoid moving twice and give them time to finalize their next place of residency. The buyer benefits financially and can use the money they’ve earned to help cover closing costs or moving expenses. The terms of a rent-back agreement are meant to benefit and protect both the buyer and seller.
What we’ve learned
A rent-back agreement is when a buyer allows a seller to stay in their home after closing, governed by certain conditions. This benefits the seller by giving them time to find a new place to live. In exchange for letting them stay, the seller pays the buyer “rent money.” The buyer can use this money to help cover closing costs or moving expenses. Using a real estate professional to help draft the terms of this agreement can be helpful so the terms of the agreement can aim both parties involved.