By Angela Colley | Jul 18, 2016
What is a rent-back agreement? You’ll definitely want to know if you’re buying a new home while selling the one you’re currently living in. As you might imagine, this double transaction can require some really good luck, timing-wise, to get just right. After all, if you sell your home and have to move out before you’ve closed on your new home or even found a place to live, that means you’ll have to either couch surf or pay to stay in hotel limbo. Either way, you’ll have to endure the hell of moving twice.
Not so with a rent-back agreement, which gives the sellers extra time to live in the home after closing, essentially letting them become the new buyer’s temporary tenants. It doesn’t last for long—there are usually time limits—but it will give sellers a chance to close on their new home and pack up for the big move.
For the buyer, offering a rent-back agreement can have a couple of big bonuses. For one, if it’s a competitive market, an offer that’s flexible on move-out dates might very well have an edge. And the rent that the seller would pay the buyer could help recoup those hefty closing costs.
Done right, it can benefit everyone, but there are some things to consider before you jump on board.
How a rent-back agreement works
Like the name implies, rent-back agreements are legally binding agreements made in writing between the buyer and the seller. Both parties need to decide on a couple of issues, namely how long the seller will need to stay in the house after closing and how much rent the seller will pay to be there. To figure out what rent would be fair, check out realtor.com/rentals in your area, then do the math.
To play it safe, the buyer may also charge a refundable deposit, just like any landlord would.
“There’s always the chance that damages could occur while the seller is living there. That’s why it’s a good idea to have a holdback deposit of anywhere between $5,000 to $10,000,” says Emily Beaven, a Realtor® with Coldwell Banker in San Francisco.
Once everyone agrees, the buyer will close on the house, at which point the buyer will officially take possession and pay any upfront costs like a normal closing. In addition, the seller will pay any security deposits or upfront rent and remain in the house.
What rent-back agreements mean for the seller?
Getting more time to buy your next dream home can be a lifesaver, but don’t dawdle—a rent-back agreement won’t buy you much time.
“Typically, lenders won’t accept anything longer [than] 60 days,” Beaven says.
While you’re still at the property, there’s one more potential downside to deal with: It isn’t really yours anymore. You technically have a landlord now, which means if you cause any damages, you may not get your security deposit back.
What rent-back agreements mean for the buyer
If you’re not in a rush to move in, offering a rent-back agreement can help you get your dream home.
“It really can make your offer stronger,” Beaven says, but don’t take it too lightly. Since you’re the new owner (and the new landlord), you might run into a few new problems.
“The buyer, like a landlord, is now responsible for making any repairs should, say, your water heater break,” Beaven says. Plus you may have to make those repairs immediately.
Buyers will also have to worry about the sellers actually moving out on time. It’s rare that they drag their feet, but it can happen. If so, you will have to go through the usual process landlords do to evict your tenants, which is rarely pleasant. Still, odds are all will go fine, and your sellers will be grateful they won’t have to move twice.
Angela Colley writes about real estate and all things renting and moving for realtor.com. Her work has appeared in outlets including TheStreet, MSN, and Yahoo. Follow @angelancolley