What is a Rent Back Agreement?
Rent-back agreements are all about timing. If you are a seller who needs more time finding a new home or needs more time to move into your new one, entering into a rent-back agreement (also known as a house rent back) with your home buyer could be the perfect option for you. Let’s break down what a rent-back agreement is, its risks and benefits, and the steps to follow to enter into one.
- A rent-back agreement allows the seller to live in their home after the closing date for a period of time by paying rent to the home buyer.
- A rent-back agreement is beneficial for sellers if they need more time finding a new home or moving into their new home.
- A buyer benefits from a rent-back agreement by receiving rental income from the seller.
What is a Rent-Back Agreement?
A rent-back agreement is a short-term leasing agreement between a home seller and a home buyer. This agreement allows the seller to live in their home after the closing date for a determined period of time by paying rent to the home buyer, sometimes by using their home equity. Home sellers and buyers might enter into a rent-back agreement when there is a delay involving the seller’s new home.
How Does a Rent-Back Agreement Work?
Sound like something you might benefit from? Here’s how this type of agreement typically works.
Step 1: Creating an Agreement Between the Buyer and Seller
A rent-back agreement should be a formal, legally binding agreement that the buyer and the seller draw up together with the guidance of a real estate attorney. The agreement should outline the duration of the rent-back period, the seller’s rent, the security deposit and insurance fees. Here are some basic guidelines for each component in the agreement:
The monthly rental rate is often determined by comparing the typical rent in the area. If the seller is planning on staying for less than a month, the rate can be divided by 30 to determine a daily rate.
The security deposit amount must be established in the agreement and if the amount will be held by the buyer or a third party.
The rent-back period, meaning the amount of time the seller will be staying in the home after the closing date, must also be determined in the agreement.
Utilities and maintenance responsibilities must be made clear. As a temporary renter, the seller might have to pay for part of the utilities on top of their rental rate. In turn, as the landlord, the buyer might have to cover any maintenance costs.
Insurance coverage is probably a given for the buyer, who likely already has home insurance. The seller, however, should get rental insurance or coverage for personal property.
Step 2: Get Legal Advice from a Real Estate Attorney
As mentioned, seeking out advice from a real estate attorney is an important step to ensure that both parties are on the same page and that no potential issues arise during the rental period. Oftentimes, when an attorney is not consulted, factors like who is supposed to cover insurance or how much rent the seller should pay can get hard to navigate.
Step 3: Get Approval from Your Lender
As a seller, you need to get approval from your lender before entering a rent-back agreement. Typically, a lender will approve a short-term rent-back period, but this can go up to 60 days.
Step 4: Sign the Rent-Back Agreement
Once the rent-back agreement is drafted with the help of a real estate attorney and approved by the lender, both parties should sign the agreement. Remember that this is a legally binding document and that for its duration, the seller is taking on the role of renter and the buyer is taking on the role of the landlord.
Why a Rent-Back Agreement Works for Sellers
A seller might benefit from a rent-back agreement for multiple reasons. Not only will it give you some extra time to shop for a new home, you will only need to move once instead of moving to a temporary housing situation in between. Entering an agreement also spares you storage costs and depending on when you secure your new home, it will allow you to move gradually instead of rushing through it in a day.
Why a Rent-Back Agreement Works for Buyers
Receiving rental income at the current market rate is a huge benefit for the buyer in a rent-back agreement. This extra cash can help cover your closing costs or appraisal fees. A less obvious benefit is the possibility of leveraging a rent-back agreement as a part of the offer on the home. If the seller needs to live on the property for some extra time, including a possibility of a rent-back agreement will make your offer more attractive to the seller.
The Cons of a Rent-Back Agreement
The main cons of a rent-back agreement are similar to those of renting, but are different for the seller and the buyer.
As the seller, monthly rent can turn out to be more expensive than you anticipated, especially if rent ends up being more than your mortgage was when you first bought your home. Remember, you are living in a home that you no longer own. Any damages or changes to the home that were not previously agreed upon might result in the loss of your security deposit.
As the buyer, who is in the role of the landlord, you might need to cover costs of maintenance. If something breaks, you are required to have it repaired in a timely manner. Additionally, in the rare event that the seller does not leave the home on time, you might find yourself in the uncomfortable position of evicting a tenant.
Preparing for the End of Your Rent-Back Agreement
Don’t let the end of your rent-back agreement sneak up on you. Again, rental rules are in effect here.
Make sure you are prepared to move out on time with all of your belongings. A quick tour of the property with the buyer to make sure that there were no damages will guarantee you get your security deposit back.
How to Determine if a Rent-Back Agreement is Right for You
If you are a home seller, you might want to consider a rent-back agreement if:
- You have received an offer on your home, but haven’t found a new home to purchase for yourself yet or haven’t had the chance to start looking.
- You are building your new home, but due to delays or the timeline of its construction, you won’t be able to move in in time.
- You have children attending school in a specific school district and don’t want to pull them out of school before the end of the school year.
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Frequently Asked Questions
Welcome to our Frequently-Asked Questions (FAQ) section, where we answer the most popular questions designed and crafted by our in-house mortgage experts to help you make informed mortgage financing decisions.
How long does a rent-back agreement last?
Typically, a lender won’t agree to a rent-back agreement that lasts longer than 60 days.
How much should I charge the seller for a rent-back agreement?
A safe way to determine the rental rate is to consult the rent prices of similar properties in your area. If the seller is staying for a period shorter than a month, dividing the monthly rate by 30 for a daily rate is possible.
What happens if the seller doesn’t leave the home?
It’s very rare for sellers not to leave the home on time at the end of the rent-back agreement. However, if this occurs, rental rules apply and the buyer (as the landlord) will have to go through the steps of evicting the seller (the tenant).
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