Sometimes a buyer and seller are ready to move forward with a transaction, but the seller would like to stay in the house a little longer for some reason. Under those circumstances, a rent-back agreement can be advantageous for both parties.
How a Rent-Back Agreement Works
A rent-back agreement allows the seller to continue to live in the house for a period of time after closing. During that time, the seller pays rent to the buyer. The parties agree on an amount based on how much comparable properties are being rented for in the same area.
The seller pays a security deposit to the buyer, who assumes the role of landlord. The buyer and seller decide who will be responsible for maintenance and insurance while the seller lives in the house after closing. The agreement is legally binding.
Advantages of a Rent-Back Agreement
If the seller has not yet found a suitable home, the seller has chosen a new house but the closing has been delayed, or the seller is having a house built and there is a construction delay, a rent-back agreement can give the seller flexibility and stability before it’s possible to move into the new house. Instead of staying with family or friends, finding a short-term rental home, or renting a hotel room and storage unit, the seller can stay a bit longer than anticipated.
A rent-back agreement can be beneficial for a seller with school-age kids. Moving during the school year can be disruptive. Parents often prefer to move during breaks to make the transition easier on their children.
If a seller isn’t prepared to move out immediately and a buyer offers a rent-back agreement, it can make that buyer’s offer stand out. Even if another party offers more money, the seller may accept the offer that includes the rent-back option.
The buyer receives rental income while the seller is still living in the house. That money can offset closing costs and other expenses.
Downsides of a Rent-Back Agreement
When the buyer takes on the role of landlord, several risks come along with it. The seller can refuse to pay rent or other costs that the parties have agreed the seller should pay, such as utilities. If the seller refuses to move out on the agreed-upon date, the buyer may have to go through a long eviction process.
Get Legal Advice
Before you sign a rent-back agreement, consult an attorney so you understand what you’re getting into. The terms of the arrangement should be clearly spelled out in a written agreement signed by both parties. In some states, if the seller will occupy the house for less than 30 days after closing, a seller in possession form can be used. It addresses many of the same terms included in a rent-back agreement.
If you’re the buyer, contact your lender. Generally, lenders will approve a rent-back agreement for up to 60 days. If it’s longer than that, you may violate the terms of your mortgage.
