What Is A Rent-Back Agreement? A Guide For Buyers And Sellers

If you’ve ever purchased a new home while trying to sell your current one, you know just how challenging this process can be. You try to balance the two timelines so that both closings happen around the same time. Unfortunately, that isn’t always possible, and you may end up selling your home before your new one is ready to move into.

That’s where a rent-back agreement comes in. When a buyer and seller enter into a rent-back agreement, the buyer rents their new home back to the seller for a certain period, often to give them more time to close on their new home.

Rent-back agreements can be mutually beneficial, but they also have some downsides for both parties.

What Is A Rent-Back Agreement?

A rent-back agreement between a home buyer and seller allows the seller to pay rent to continue occupying the home for a certain period of time after the closing date. This arrangement typically occurs when the seller needs more time to find and buy a new home or wants to avoid moving multiple times.

How Does A Rent-Back Agreement Work?

Before you enter into a rent-back agreement, it’s important to understand just what you’re getting yourself into. Here’s the process for entering into this type of agreement.

1. Consult An Attorney

Having an expert in your corner is always a good idea. Given the complexity of a rent-back agreement, it’s important to consult with a real estate attorney, and preferably one who has experience with this type of agreement. Your attorney can take precautions by outlining the responsibilities of both parties, including provisions for preventing adverse possession.

2. Notify The Lender

Before entering into a rent-back agreement, it’s important to notify your lender. A rent-back period shorter than 60 days is usually approved by a lender. However, longer durations could cause problems if the loan documentation states owners will occupy the property. In other words, a long rent-back period blurs the line between a primary residence and a rental property.

3. Sign The Rent-Back Agreement

The rent-back agreement is a legally binding document, just like any other rental lease. It specifies the agreement length, security deposit amount, rental rate (as either a monthly or daily rate), utility costs, homeowners insurance and home maintenance responsibilities.

4. Consider A Seller In Possession Form (SIP)

A seller in possession form (SIP) is a document that’s used alongside a purchase agreement. In this case, the buyer is granting the seller a license to stay in the home rather than a lease. SIP forms cover many of the same details as standard rent-back agreements, but typically only for rent-back periods that last 30 days or less.

Pros And Cons Of Rent-Back Agreements

Rent-back agreements have pros and cons for both the seller and the buyer. Of course, every situation is different, so some rent-back agreements may be more beneficial to the buyer, while others are more beneficial to the seller. Either way, you’ll want to make sure the agreement is fair and doesn’t put either party in a difficult position.

Pros For Sellers

• More time to move: Perfectly lining up the process of buying and selling homes at the same time can be challenging. A rent-back agreement allows you as the seller to extend their moving timeline to make the schedule work better.
• Avoid multiple moves: It can be a lot of work to move out of one home, only to have to move again shortly after. A rent-back agreement can help you avoid multiple moves when buying and selling a house at the same time.
• Flexibility for life events: Even the best-planned move can go awry. A rent-back agreement gives some flexibility when life events come up that prevent you from moving out of your house on time.
• Less stress: Selling a house is stressful, as is buying one. And when you’re doing both at the same time, it can easily become overwhelming. Having the extra time from a rent-back agreement can help sellers reduce their stress significantly.

Cons For Sellers

• Potentially more expensive monthly payment: Buyers have to make the rent-back agreement worth allowing you to stay in the home. For that reason, you may find that your payments during the rent-back period are more expensive than your previous monthly mortgage payment.
• Inability to make renovations: While the house may still feel like your home, once you enter the rent-back period, it’s no longer yours. You won’t be able to make any changes or renovations, no matter how long the rent-back period is.
• Risk of losing security deposit: Just like when you rent an apartment, you must pay a security deposit when you enter into a rent-back agreement as the seller. If you don’t meet all the terms of the agreement, you could end up losing the deposit when you move out.
• Possible lapse in insurance coverage: Your homeowners insurance policy likely ends when you sell the home, but you still want protection for all of your belongings. You may either have a lapse in coverage or need to get a temporary renters insurance policy to protect you during the rent-back period.

Pros For Buyers

• More enticing offer: In a competitive housing market, you need something to make an offer that stands out. Offering a rent-back agreement could make your offer more enticing, even if it’s not the highest dollar amount.
• Passive income: During the rent-back period, the seller is paying rent to continue living in the home. As long as the amount they’re paying you is higher than your mortgage payment, that rent could serve as a sort of temporary passive income.
• Extra savings: The rental income you get from the rent-back agreement can offset the costs of buying a house (such as close costs, down payment, etc.) and help you boost your savings. You could then put that money to use, making the house your own once you move in.

Cons For Buyers

• Property owner responsibilities: When you planned to buy your new home, you probably weren’t anticipating being a landlord. And unfortunately, renting out a house through a rent-back agreement requires that you take on certain responsibilities.
• Delayed move-in schedule: If you allow the seller to rent back your new home, you’ll have to delay your own move-in. Depending on your situation, that could mean paying rent for longer. And no matter what, you won’t able to enjoy your new home as soon as you hoped.

Rent-Back FAQs

There’s a lot to consider before entering into a rent-back agreement as either a buyer or a seller. Here are a few more things you should know about these agreements to help you decide whether one is right for you.

How long does a rent-back agreement last?

A rent-back agreement usually must be 60 days or less since lenders aren’t likely to approve an agreement longer than that. However, it’s up to the buyer and seller to decide how long the agreement will be within those 60 days.

How much should I charge for a rent-back agreement?

There’s no one right answer when it comes to how much to charge for a rent-back agreement. You’ll want to charge at least as much as you’re paying for the mortgage, homeowners insurance and property taxes. Your real estate agent can help you determine an appropriate amount to charge.

What happens at the end of a rent-back agreement?

The end of a rent-back agreement is similar to the end of any lease. The tenant – in this case, the seller – moves out of the home. Assuming the seller abides by the agreement, the buyer will return the security deposit.

What if the seller doesn’t leave at the end of a rent-back agreement?

If the seller doesn’t move out at the end of the rent-back agreement, the buyer will have to evict them as they would any other tenant who won’t leave. Unfortunately, this can create added time and costs for the buyer, preventing them from moving in to their home.

When is a rent-back agreement a good idea?

A rent-back agreement could be a good idea if the seller needs additional time to move out – perhaps because they haven’t closed on their next home yet – and the buyer is able to delay their move-in date.

The Bottom Line

A rent-back agreement is a unique arrangement between a buyer and a seller where the seller rents the house from the buyer after the closing. While these aren’t the norm, they do occur in situations where the seller needs more time to move out of the house.

If you’re considering buying a home, you’ll need the sign-off from your lender to enter into a rent-back agreement. To start your home search, get approved with Rocket Mortgage^Ⓡ and find your perfect home.