The Pros And Cons Of A Rent-Back Agreement
When buying a home, having the highest offer certainly helps to get it accepted by sellers, but it’s not the only thing that counts. For sellers who need a little more time to pack up and move out, an offer to rent back the property can not only earn you extra income, but it also signals flexibility that could help you in negotiations.
What Is A Rent-Back Agreement?
A rent-back agreement is a contract between the home buyer and seller that allows the seller to stay in the house for a period of time after closing. This provides the seller more time to find a new home of their own and allows the buyer to collect payments during the rent-back period.
Selling a house can be a stressful process. We find ourselves in a tight real estate market. In addition to giving homeowners more time to find a new home if necessary, a rent-back agreement could also allow those with children to finish out the year at their current school.
In order to negotiate a rent-back agreement, you would typically work with your REALTOR® or other licensed real estate agent.
How Does A Rent-Back Agreement Work?
With a rent-back agreement, you’re allowing the current homeowner to rent the home back from you after closing for a specified period of time. As such, there are several steps you should take in this process.
- Negotiate the details. It’s not just the duration and rental charge. Among other things, make sure you touch on the security deposit as well as who’s responsible for homeowners insurance, utilities and maintenance.
- Have an attorney look it over. Just like your purchase agreement, this is a legal contract. Having everything properly laid out in advance decreases the chance of disputes in the future.
- Tell your mortgage company. If the home is going to be used as your primary residence after the current homeowners move out, your lender is responsible for determining that you have indeed moved in. They need to know so they can approve the agreement and hold any potential inspection until after you move in.
The Pros And Cons Of A Rent-Back Agreement
Rent-back agreements have their pros and cons. Let’s take a look.
Pros Of A 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 gets some extra income from the rental period. Buying a house comes with several upfront expenses including the down payment and closing costs. This could help replenish your savings.
- As a buyer, the ability to offer a rent-back agreement makes your offer stronger by showing your flexibility should the seller need it. If there are several comparable proposals on the table, this could be the extra edge that increases the chances of your offer getting accepted.
Cons Of A Rent-Back
- When a rent-back agreement is negotiated, it’s often done based on the fair market value for monthly rent for an equivalent space. This may be more expensive for the seller than their mortgage payment.
- If there’s damage to the house, sellers could lose their security deposit.
- The buyer can’t take possession of the house upon closing.
- A buyer ends up taking on landlord responsibilities. This 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 get in writing who’s responsible for what.
Rent-Back Agreement: FAQs
Now that we’ve touched on some general information as well as the benefits and disadvantages, let’s answer a few of the most common questions.
How long does a rent-back agreement last?
You can make the agreement as short as you and the seller want to negotiate. However, if you’re moving into the home as your primary residence, mortgage investor regulations mean that your lender likely won’t be able to approve a rent-back agreement that’s 60 days or longer.
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 them for less than a month, you just divide the rental rate by the number of days in the month.
What if the seller does not move out after the rent-back period ends?
In the event that 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 go over the initial contract.
The Bottom Line
A rent-back agreement allows sellers to rent from buyers for a period of time after they close on the sale of their home. This can often make offers stand out because it signifies flexibility. You also get some extra income out of the deal. On the other hand, you can’t move in right away and you do have landlord responsibilities.
Now that you know more about what to expect, if you’re ready, you can apply for a mortgage. You can also feel free to speak with one of our Home Loan Experts at (833) 230-4553.