The Pros And Cons Of A Rent-Back Agreement
When buying a home, having the highest offer certainly helps to get it noticed by sellers – but money isn’t the only thing that counts. A seller who needs a little more time to pack up and move out may look favorably at an offer with the option to rent back the property. For buyers, it signals flexibility that can help in negotiations and may even earn you extra income.
Let’s take a look at what a rent-back agreement is and the pros and cons of offering the one.
What Is A Rent-Back Agreement?
A rent-back agreement is a rental contract between a home buyer and seller that allows the seller to stay in the house for a specified period of time after closing. The agreement gives the seller more time to find a new home and allows the buyer to collect payments during the rent-back period.
A rent-back agreement can offer sellers many advantages, including more time to find a new home, or if they have school-age children, allow sellers the time they need to let their kids finish their school year.
You would typically work with your REALTOR® or other licensed real estate agent to negotiate a rent-back agreement.
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How Does A Rent-Back Agreement Work?
With a rent-back agreement, you allow the former homeowner to rent the home for a specified period of time after the closing. There are several steps you should take in this process.
- Negotiate the details: You’ll need to decide on more than the rent-back duration and rental charge. Among other considerations, you’ll need to outline the details of the security deposit and specify who’s responsible for homeowners insurance, utilities and maintenance.
- Have an attorney look it over: Like your purchase agreement, a rent-back agreement is a legal contract. Having a real estate attorney review the agreement is a good idea. With everything properly laid out in advance, you’ll decrease the chance of disputes in the future.
- Tell your mortgage company: If you purchased the home to use as your primary residence after the sellers move out, your lender is responsible for determining that you moved in. They need to know so they can approve the agreement and pause any potential inspection until after you move in.
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The Pros And Cons Of A Rent-Back Agreement
Rent-back agreements have pros and cons. Let’s take a look.
Pros Of A House Rent-Back
- The seller gets more time to buy and move into their new home.
- Sellers don’t have to find temporary living arrangements and storage because they don’t have to move twice.
- The buyer may earn extra income during the rental period. Since buying a house comes with several upfront expenses, including the down payment and closing costs, the extra income could help replenish your savings.
- As a buyer, the ability to offer a rent-back agreement can make your offer stronger because it signals your ability to be flexible, should the seller need it. If there are several comparable proposals on the table, a rent-back offer could be the extra edge that increases the chances of your offer getting accepted.
Cons Of A House Rent-Back
- When a rent-back agreement is negotiated, rent is usually based on the fair market value of monthly rent for an equivalent space. The rent may be more expensive for the seller than their mortgage payment.
- If there’s damage to the house, sellers may lose their security deposit.
- The buyer can’t take possession of the house upon closing.
- The buyer ends up taking on landlord responsibilities. Being a landlord can be a bit demanding and may be costly if something major breaks while you’re responsible for maintenance.
- Homeowners insurance can become an issue in the event of major property damage. Make sure you put down in writing who’s responsible for what.
Rent-Back FAQs
Now that we’ve touched on some general information as well as benefits and disadvantages, let’s answer a few of the most common questions about rent-back agreements.
How long does a rent-back agreement last?
You can make the agreement length as short or as long as you and the seller want. However, if you’re moving into the home as your primary residence, your lender likely won’t be able to approve a rent-back agreement that’s 60 days or longer due to mortgage investor regulations.
How much should I charge for a rent-back agreement?
Again, this is a negotiation. But one thing buyers and sellers often use as a baseline is a market rent analysis. Done properly, this gives you a monthly rental rate for a house. If you’re renting to the sellers for less than a month, divide the rental rate by the number of days in the month.
What if the seller doesn’t move out after the rent-back period ends?
If the seller doesn’t move out at the end of the agreement, you may have to go to court and initiate eviction proceedings. The laws regarding this are different in every state, but this is another reason that it’s good to have an attorney review the initial contract.
The Bottom Line
A rent-back agreement allows sellers to rent from buyers for a specified period of time after they close on the sale of their home. It can often make a buyer’s offer stand out because it signifies flexibility to a seller who may desperately need it. While you may be tempted by the prospect of making some extra income from the deal, remember that you won’t be able to move in right away, and you automatically become a landlord. But if it works with your moving timeline, a rent-back agreement may help you purchase a home.
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