What is a Rent-Back Agreement?CASAPLORERTrusted & Transparent
Have you ever heard of becoming a tenant in the house you just sold? Well, it is possible. If you are looking to sell your house but you need more time before moving out and handing the keys to the new owners, there is a solution that buys you more time. You can come to an agreement with the buyer to let them rent the place out to you for a period of time after the sale has closed.
What You Should Know
- A seller can ask the buyer of their house to rent them the place for a period of time after closing. This is a rent-back agreement.
- The rights, duties, and responsibilities of the buyer and seller should be included in either a “Seller in possession” form or a formal rental agreement
- The buyer’s lender may have occupancy restrictions that prevent the buyer from renting out the home for more than a certain period of time
- When deciding the rental price, take into account the expenses that you will incur such as mortgage payments, taxes, insurance, and the market value of similar homes
What is a rent-back agreement?
In a typical real estate transaction, the buyer will make an offer on the house and the seller will either accept, reject it or make a counteroffer. If the seller accepts the offer, then they will have to move out once the sale officially closes and the buyer is the new owner of the house. Then the seller moves to their new place. However, for various reasons, the seller may have not found their new home by the time that the sale closes. More than often, sellers list their house for sale and look for a new place simultaneously, and the timeframe of each may not match. They may either find the new place immediately, and end up owning two homes at the same time, or they will have already sold their current home and have nowhere to go.
Rent-back agreements are a solution to avoid the hassle of moving to a temporary place until the new home is found and later move again to the new place. In a rent-back agreement, the buyer agrees to rent the house to the seller for a specified period of time at a rental price that they determine. This way the seller can avoid the double move and stay in the comfort of their own house for the time remaining.
Why would a buyer agree to rent back?
In a seller’s market, there are more buyers looking to purchase than houses available for sale. This means that a seller will receive multiple offers on their house and buyers will have to make their offers stand out. Among buyers that offer the same price for the house, the seller will accept the one that includes better terms. If the seller has yet to find their next home, better terms can include a later closing date or willingness from the buyer to consider a rent-back agreement. This way buyers can make their bids more attractive. In very competitive markets, some buyers may even agree to rent back the house to the seller free of charge,
However, if the property is already vacant, the seller would not need a rent-back agreement since they have already moved. In this scenario, offering to rent back would not make the offer more attractive. Therefore, before offering to rent back, consider whether the seller would need it. Some of the instances when a seller is likely to need a rent-back agreement include:
- Seller wants to move to a different area - Looking for a home in your own area is a lengthy process as it is, searching for one that is hours away from you, is another struggle of its own. If during the negotiations, the seller still hasn’t found a place, then they are likely going to need to rent back.
- Competitive seller’s market - If the market is competitive for buyers, then the seller will have a hard time finding their new home. The seller is now in the same position the buyer was when searching for their house.
- Seller has children that go to school - If the seller is planning to move to another neighborhood or city and they have children going to school, that means that they would have to switch schools during the transition. The seller may not want to do this during the school year and will want to wait for summer to move out.
- Seller uses the home as a vacation home - If the house the seller is selling is a vacation home for them, for example, a winter or summer residence, then they may want for the season to end before they move out.
How long can you rent back the property?
Technically, the buyer can rent back the property to the seller for as long as they want to. However, there are some things that depend on the timeframe that the house is being rented for to the seller. Some of the things to consider include:The Agreement Form
Seller in Possession - If the seller is renting the house for less than 30 days, then a “Seller in Possession” form can be used. This form includes most of the general terms of renting a property such as the rental rate, the amount of the security deposit, who is responsible for utilities, etc. The seller is asked to sign this form by the buyer.
Formal Rental Agreement - On the other hand, if the seller wants to stay in the house for more than 30 days, then there should be a formal rental agreement in place. The formal rental agreement will contain the rental rate, the rental period, whether the contract is renewable and other terms and conditions relating to the rights and responsibilities of both parties.Lender’s Approval
Usually, buyers finance the purchase of their house through a mortgage. The lender may have restrictions regarding who occupies the house. Typically, the buyer has to move into the new house 60 days after closing.
If the buyer wants to rent the home out to the seller for a longer period of time, the lender may consider the home, an investment property, and lenders charge higher interest rates on investment properties. Therefore, the buyer wouldn’t want to let the seller rent the home for a longer period than their lender allows them to, as they would end up paying a hefty price in the long run.
What to consider when offering a rent-back agreement?
Before rushing in and agreeing to rent your house to the seller, it is important to understand the responsibilities that come with being a landlord. You will have to decide on a variety of issues including:Rent Price
There are typically two approaches to setting a rental rate. The first one is to charge as much as your monthly expenses will be. These expenses can include the mortgage payment on the house, taxes, and insurance. If the owner is renting the home for less than 30 days, you can find out your daily expenses and multiply it by the number of days the seller will be occupying the home. The next approach is to use market value and see what similar houses in the market are being rented for.
Whichever approach you choose, make sure that you highlight in the contract when the rent is due and any penalties or fees that are charged for late payment.Security Deposit
The seller has to leave the house in the condition they found it when they first started renting it. So that the buyer, or landlord, can protect themselves against potential damages to the property, they may choose to collect a security deposit from the seller or tenant. The security deposit is then returned to the seller if no damages are found in the house. The funds of the security deposit are usually held in an escrow account during the rental period.Utilities
The written agreement should include who is responsible for the utilities. Typically, either the tenant is the one that pays for the utilities or the cost is split between the tenant and the landlord.Maintenance and Repairs
The agreement should highlight who will pay for the maintenance and repairs needed around the house during the period of time that the seller is renting the home. Usually, the landlord is responsible for maintaining the property and repairing anything that was damaged due to normal use.Insurance
Insurance is a part that concerns the seller more. Since the house will now be under the buyer’s name, it will not cover the belongings and possessions of the seller or tenant. The seller should consider getting a renter’s insurance coverage.