What is a rent-back agreement?

Moving homes is hard enough, but it becomes more complicated when you’re juggling the timing of selling one home in order to move into a new one. Buyers typically agree to give the seller a week to 10 days to move out after closing on a home, but that may be easier said than done. 

The timing hurdle is a challenge for sellers and buyers alike, which is why rent-back agreements can be a valuable tool. Essentially, a rent-back agreement gives sellers extra time to live in a home after closing by paying rent to the new buyer.

Rent-back agreements have benefits for both buyers and sellers, which makes them especially useful for anyone who is trying to sell before they buy.

What is a rent-back agreement?

A rent-back agreement is a rental or lease agreement that states that a seller may continue to live in the home they just sold for a certain amount of time after closing. The seller becomes the buyer’s tenant, paying rent until they find a new place to live.

Most of the time, these are short-term deals as sellers may just need a little time to close on their next home. A seller may also have school-aged children and want to ensure they can finish out the school year before having to move. Sometimes, these agreements may be longer-term if sellers love their home but want to cash out equity by selling to an investor.

How does a rent-back agreement work?

Not all rent-back agreements are premeditated. If a seller realizes that they’ll need extra time to find a new home before the buyer moves in, they can request a rent-back agreement any time before closing. 

The details of the rent-back agreement, then, should be disclosed in a signed document written into the closing documents. This agreement should dictate the term of the rent-back agreement, the rental payment, and determine who is responsible for maintenance, utilities, and other costs during the course of the agreement.

Generally the process plays out like so:

1. Consult with an attorney and notify the lender

If the seller would like a rent-back agreement, both parties should consult with a real estate attorney to help negotiate and formalize the agreement. Additionally, buyers must notify their lender. Most lenders will approve a short rent-back of up to 60 days. Anything longer than that and you may need to go through a special approval process.

2. Sign the rent-back agreement

At closing, both buyer and seller will sign the legally binding rent-back agreement that spells out the terms of the agreement. A rent-back agreement usually includes:

• Rental rate paid to the new owner.
• Whether a security deposit (if agreed upon) will be held in escrow or released to the buyer.
• Length of the agreement.
• Who is responsible for utilities and home maintenance costs.
• Insurance coverage for both the new owner and the seller who is renting back the property.

3. Seller moves out after the rent-back agreement term

As mentioned before, rent-back agreements rarely last longer than 60 days. Most lenders won’t approve a longer rent-back agreement because insurance companies limit how long they’re willing to extend homeowners’ insurance for a seller who doesn’t technically own the home anymore. Plus, new owners can’t wait forever to move into their own home.

Rent-back agreements can also last as short as a few days. Once the term is over, the seller must move on to their next home. If the seller does not move out on time, the buyer has the right to evict.

This type of workaround agreement is typical of the traditional way of buying and selling a home at the same time. In some markets, you can work with Orchard to buy your new home first, then sell your old one — so there’s no awkward “renting your own home” stage. 

Advantages of a rent-back agreement for sellers

A rent-back agreement has a few key benefits for sellers. Those include:

• More time to find the perfect next home.
• Prevents a seller from having to move between temporary housing as they continue their permanent home search.
• It reduces stress on the seller as it provides some extra time to find that next home.

Advantages of a rent-back agreement for buyers

Rent-back agreements can be beneficial for buyers, as well. Some of the key benefits include:

• Offering a rent-back agreement to a seller may make a buyer’s offer more attractive. If you demonstrate that you’re flexible with the move-in timeline, it might be enough for a seller to choose your offer over a competitor.
• Buyers can immediately recoup some of their investment by earning rental income at the current market rate. It may not pay your mortgage completely, but it will help offset mortgage payments and other fees included in closing.

Risks of a rent-back agreement for sellers

The biggest risk of rent-back agreements for sellers are related to being a little too familiar with homes that are no longer their own. Some issues that may arise include:

• The rental market dictating a more expensive monthly payment. Maybe you refinanced your mortgage — or even paid it off — and you’re suddenly paying more than you were to live in the same house.
• You can’t make any permanent changes during the rent-back period, so if you really wanted to fix up the kitchen, you should have done it before selling.
• If any damage occurs to the property during the rent-back period, you may lose your security deposit.

Risks of a rent-back agreement for buyers

Buyers are getting paid during a rent-back agreement but that doesn’t mean there aren’t drawbacks. Some of the most common disadvantages include:

• Buyers must play landlord for a short period of time. That means going through the process of collecting rent and a security deposit, creating a lease, and potentially even paying for maintenance in a home you haven’t moved into yet.
• Of course, buyers who agree to a rent-back agreement must wait to move into their new home. That means you have to find some other temporary housing that may be expensive or inconvenient.
• Renters don’t always move out when they’re obligated to or pay the rent on time. Evicting a seller after a rent-back agreement expires can be a huge headache. So don’t enter into a rent-back agreement with a seller that seems even remotely shady.

Rent-back agreements have benefits for both buyers and sellers if constructed well and upheld honestly. If you as a buyer have a little flexibility with your moving timeline, it can be a financially smart decision to offer a rent-back agreement to a seller. As a seller, a rent-back agreement gives you some more time to find a new home. Make sure to discuss this option well before closing day, however, and let your real estate attorneys handle the fine print.