What Is a Rent-Back Agreement?
When you’re selling a home, the timing has to be perfect. If you sell before you’ve bought another place, you’ll have to find temporary living arrangements and potentially move twice. Buy-back agreements allow you to stay in your home after you’ve sold it if you need more time to make other living arrangements. The buyer […]
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When you’re selling a home, the timing has to be perfect. If you sell before you’ve bought another place, you’ll have to find temporary living arrangements and potentially move twice.
Buy-back agreements allow you to stay in your home after you’ve sold it if you need more time to make other living arrangements. The buyer gets to earn some extra cash through rental income, and you get more time to figure out your next steps. It’s a win-win for everyone.
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What is a rent-back agreement?
A rent-back agreement is a temporary rental contract between a home seller and buyer that allows the seller to continue living in the property for up to 60 days after closing. Essentially, the seller becomes a temporary tenant and the buyer becomes a landlord.
Rent-back agreements usually last no more than 60 days because lenders have strict requirements for how soon a home must be occupied before it’s considered an investment property.
These types of arrangements can be helpful in a handful of situations:
- The sellers haven’t found a new home yet.
- The sellers need more time before moving out.
- The sellers are building a newly constructed home that’s delayed.
- The sellers want their children to finish out the school year.
- The buyers are relocating for work or other reasons and don’t need to move into the home immediately.
Rent-back agreements are common in competitive housing markets with a shortage of available homes. They’re also called a “post-settlement occupancy agreement.”
How does a rent-back agreement work?
You often negotiate a rent-back agreement while negotiating the sale or purchase of a house. The process usually goes like this:
- The seller requests a rent-back agreement. During the home sale process, the buyer and seller negotiate the terms of the rent-back agreement, including the length of the rental period, monthly rent, security deposit, and any other conditions.
- Include the agreement in the sales contract. Once both parties agree on the terms, you add the rent-back agreement as a contingency in the sales contract.
- Notify the lender. The buyer will likely want to notify their mortgage company about the rent-back agreement to ensure it complies with their guidelines.
- Close on the property. On the closing date, the buyer takes ownership of the property, and the seller receives the proceeds from the sale. The rent-back agreement goes into effect.
- Seller pays rent to the buyer. During the rent-back period, the seller pays the agreed-upon monthly rent to the buyer. The rent is typically equivalent to the buyer’s mortgage payments, property taxes, and insurance.
- Seller vacates the property. Once the rent-back agreement ends, the seller moves out and the buyer moves in. If the seller doesn’t move out in time according to the agreement, the buyer has the right to evict them just like you would in a standard tenant-landlord situation.
- Charge a holdover fee if necessary. If the seller stays longer than agreed, charge a holdover fee to compensate for the additional time and any inconvenience caused to the buyer. Ensure this holdover fee is outlined in the rent-back agreement ahead of time.
Important terms & conditions in rent-back agreements
It’s common to come across these terms and conditions in a rent-back agreement:
- Rental period: The length of time the seller will remain in the property after closing, typically limited to 60 days.
- Monthly rent: The amount the seller will pay the buyer each month during the rent-back period.
- Security deposit: A refundable deposit paid by the seller to the buyer to cover potential property damage during the rental period.
- Utilities and maintenance: The agreement should specify who pays utilities and handles maintenance issues during the rent-back period.
- Renters insurance: The buyer may require the seller to get renters insurance to cover their belongings and potential liabilities during the rental period.
Types of rent-back agreements
There are two common types of rent-back agreements: short-term and longer-term. The type you use depends on how long the seller needs to stay in the property after closing.
- Short-term agreements. If the seller needs to stay for 30 days or less after closing, you can often use a Seller in Possession (SIP) form. This simple, standard agreement covers the basics—like how long the seller can stay, how much rent they’ll pay, and any other conditions. SIP forms aren’t available in all states, so check with your real estate agent or attorney to see if you can use one. Here’s a sample SIP form for California.
- Longer-term agreements. If the seller needs to stay more than 30 days, you usually use a more detailed rent-back agreement that acts like a mini-lease. It covers the length of the rent-back period, rental rate, security deposit, and who’s responsible for maintenance, among other things.
In California, for example, longer-term rent-back agreements are called Residential Lease After Sale (RLAS) forms. They may have different names in other states
Rent-back agreements vs. home sale-leasebacks: what’s the difference? A rent-back agreement differs from a home sale-leaseback, in which you sell your property to a company or investor and then lease it back from them for a set number of years. Sale-leasebacks are often used to get equity out of your home, while rent-back agreements buy you more time before you move out after a sale.
What should a rent-back agreement include?
A well-crafted rent-back agreement helps protect buyers and sellers by clearly outlining the terms and conditions of the arrangement. Here are some key elements to include:
- Rent amount and payment terms. Specify the amount of rent the seller will pay to the buyer and the due date for each payment.
- Security deposit. Decide on a refundable security deposit amount, which will be refunded to the seller once they move out if there’s been no property damage.
- Utilities and maintenance costs. If you set up the agreement like a traditional rental, the seller may be responsible for utilities, while the buyer is responsible for maintenance.
- Rental period. Clearly state the start and end dates of the rent-back period.
- Property damage. Outline who is responsible for any damages to the property during the rent-back period and how disputes will be resolved.
- Renters insurance. Require the seller to get a renters insurance policy for their personal items.
- Property access. Specify when and under what circumstances the buyer may access the property during the rent-back period.
- Consequences for breach of agreement. Describe the consequences if either party fails to uphold their obligations under the agreement.
Rent-back agreements should always be put in writing—even if you’re letting the seller stay for free. It’s best to work with a real estate professional to draft the agreement. This not only speeds up the process but also ensures all your bases are covered.
Rent-back agreement template
Below is an image of a sample rent-back agreement template for the state of Colorado:
From pdffiller.com, approved by the Colorado Real Estate Commission.
This sample rent-back agreement template includes fields for the property address, seller and buyer names, rental period, rent amount, security deposit, and other terms and conditions.
It’s a solid starting point, but still, tailor the agreement to fit your needs and work with a real estate attorney to double-check that it’s comprehensive and legally enforceable.
Pros and cons of a rent-back agreement
Pros
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Helps the seller avoid moving twice
Rent-back agreements give sellers extra time to find and close on a new home without the need for temporary housing or the hassle of moving twice.
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Buyer earns rental income
Buyers can use the money made from a rent-back agreement to offset mortgage payments and closing costs.
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Makes buyers’ offers more attractive in a competitive housing market
If inventory is limited, a seller may be more willing to accept a buyer’s offer if it contains a rent-back agreement because it shows the buyer is flexible and understands the seller’s need for extra time to move out.
Cons
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Sellers may pay more in rent than previous mortgage
The rent charged during the rent-back period may be higher than the seller’s previous mortgage payments.
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Buyers have to delay their move-in timeline
Rent-back agreements require buyers to postpone their move-in date, which may be inconvenient if they need to move in quickly or have already given notice at their current residence.
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Buyers essentially become a landlord
Becoming a landlord—even temporarily—isn’t for the faint of heart. The buyers could not leave on time or leave the property in poor condition. You may also be responsible for anything that breaks while the sellers live there.
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Potential legal and financial risks
If either party fails to uphold their obligations under the agreement, it could lead to legal disputes and financial losses. Buyers may also face complications with their lender or home insurance company if the rent-back period exceeds 60 days.
Ask the expert
When weighing the costs of a rent-back agreement and if it makes sense, consider the cost of movers, potential storage units, and a short-term rental. Understanding how these numbers would compare to a security deposit, market rent, and additional costs such as utilities, insurance, and maintenance for your required term is important. In addition to comparing the costs, consider the hassle of moving twice or having to make a temporary move if there is significant time before you can move into a new home. For example, if you have small children or other dependents, the additional costs could be worth avoiding the disruption to your family.
How to negotiate a rent-back agreement
The goal of a rent-back agreement is for both parties to reach a mutually beneficial arrangement. Whether you’re the buyer or the seller, use these tips to negotiate a rent-back agreement that works for you both.
Negotiating tips for sellers
- Be transparent about your timeline. Be honest with the buyer about how much time you need to move out. Give a realistic timeline and explain your reasons for needing the rent-back agreement.
- Be open to compromise. Be willing to negotiate any part of the rent-back agreement, including the number of days you’ll stay, the rental rate, the security deposit, and other terms.
- Maintain the property. During the rent-back period, treat the home as if you were a tenant. Keep the property clean, make minor repairs, and follow any guidelines the buyer sets.
Negotiating tips for buyers
- Set clear expectations. In the written rent-back agreement, clearly define your expectations for the property’s condition, utility payment, and any other important terms.
- Limit the rent-back period. Aim to keep the rent-back period as short as possible, ideally, no more than 60 days, to avoid potential issues with your lender and to minimize delays in moving into your new home.
- Involve professionals. Work closely with a real estate professional to draft a legally sound rent-back agreement that complies with local laws.
Ask the expert
A rent-back agreement could cost the seller more in the long run, as the costs can eat into the proceeds from the sale of your home. There is also a risk of property damage during the rental term, which could be taken from your security deposit.
FAQ
What is the typical duration of a rent-back agreement?
The typical duration of a rent-back agreement can range from a few days to a few months. Short-term rent-back agreements often last 30 to 60 days, allowing the seller additional time to transition to a new home.
In some cases, agreements can extend up to six months or longer, depending on both parties’ needs and mutual agreement.
How is the rent amount determined in a rent-back agreement?
The rent amount in a rent-back agreement is usually determined by the property’s fair market rental value. Both parties can agree to a rent amount that reflects local rental rates for similar properties.
The rent amount needs to be fair and reasonable to avoid any disputes. In some cases, the buyer and seller may negotiate a higher or lower rent based on specific circumstances, such as the duration of the agreement or the inclusion of utilities.
What happens if the seller damages the property during the rent-back period?
If the seller damages the property during the rent-back period, the terms of the rent-back agreement should outline the responsibilities and consequences. Most agreements include a security deposit the buyer can use to cover damages.
The agreement may specify that the seller is responsible for any repairs or financial restitution for damages beyond normal wear and tear. Documenting the property’s condition before and after the rent-back period is crucial to avoid disputes.
Can a rent-back agreement be extended?
Yes, a rent-back agreement can be extended if both parties agree to the extension. The terms of the extension, including the duration and any adjustments to the rent amount, should be documented in writing and signed by both parties.
It’s important to communicate and negotiate the extension well before the original agreement expires to ensure a smooth transition.
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