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Rent-Back Agreements: The Risks And Rewards

Katie Ziraldo4-minute read
February 02, 2022

In any real estate transaction, timing is key. While entirely possible, buying a house during the process of selling your current home can be incredibly stressful.

You can’t control precisely when your home will sell or when you’ll find what you’re looking for in your new house, so how do you ensure you’ll actually have somewhere to live when your home sale closes? Depending on your personal and financial situation, a rent-back agreement may be just the answer you’ve been looking for.

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.

Sometimes called a post-settlement occupancy agreement, this type of arrangement typically occurs when the seller is experiencing delays in moving into a new property.

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What Are The Benefits Of Rent-Back?

A rent-back agreement can be beneficial for both the buyer and seller under the right circumstances, but it’s important to remember that every situation is different. To help you decide if this type of arrangement makes sense for you, let’s review some of the potential perks.

For Sellers

  • More time to make a move: A rent-back agreement may alleviate the stress of trying to find a new home during your current home sale. It will provide you with as much time as the buyer is willing to give to stay in the home.
  • Avoid moving multiple times: These arrangements are also used to mitigate delays in moving into a new home. If your new home won’t be available for another 2 months, this can help you avoid moving into temporary housing just to pick up and move again when your home is ready for you.
  • Flexibility for life events: You can’t always control when your home will sell, so if you have a specific timeline of when you’d like to move, this type of arrangement can be helpful. For example, it may allow you to stay in your home long enough for children in school to finish the year or semester before moving.

For Buyers

  • Agreeing to a rent-back can make your offer more enticing: If the seller needs somewhere to live for a month or so and the buyer is willing to allow it, offering a rent-back agreement may make the offer more appealing to the seller.
  • Earn passive income to offer the mortgage: The income you could earn from collecting rent may aid in making your first few mortgage payments.
  • Save money elsewhere: If the seller is in strong need of a rent-back agreement, you may be able to negotiate other fees related to buying the home, including closing costs, appraisal fees, home inspection fees and legal fees.

Be Aware Of Rent-Back Agreement Risks

Despite all the potential advantages, the fact remains that rent-back agreements can be a risky endeavor if either of the involved parties has failed to consider the implications.

Risks For Sellers

  • More expensive monthly payment: Renting the home could end up costing more per month than you were paying for your mortgage.
  • No permanent changes allowed: While you’re renting back the home, you will be unable to make any permanent changes to the property.
  • Potential loss of security deposit: If damage occurs during the rent-back period, you run the risk of losing your security deposit.
  • Potential lapse in insurance coverage: The insurance company may refuse to cover claims because it’s no longer the seller’s property, so you may need to find alternate coverage for your personal belongings.

Risks for Buyers

  • Need to act as a landlord: While the seller is renting back the property, you will take on additional responsibilities as a landlord, including drawing up a lease, collecting rent, and even potentially evicting the seller if necessary.
  • Delayed move-in: This may go without saying, but of course the buyer won’t be able to move into their new home until the rent-back agreement period has ended. This can potentially delay move-in schedules by weeks or even months.

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How Should I Enter A Rent-Back Agreement?

So how does a rent-back agreement work? Remember: as a buyer, you should never allow the seller to remain in the home post-closing without signing a formal agreement. To obtain a rent-back agreement, take the following steps:

  • Consult an attorney specializing in real estate law: Having an expert in your corner is always a good idea. Your attorney can take precautions by outlining responsibilities of both parties, including provisions for preventing adverse possession.
  • Notify the lender: A rent-back period shorter than 60 days is usually approved by the lender. Longer durations could cause problems if the loan documentation states when owners will occupy the property.
  • Buyer and seller sign the agreement: This is a legally binding document specifying the agreement length, security deposit amount, rental rate (as either a monthly or daily rate), utility costs, homeowners insurance, and home maintenance responsibilities.
  • Consider a Seller In Possession (SIP) Form: For rent-backs that last 30 days or less, SIP forms cover many of the same details as a standard rent-back agreement.

The Bottom Line

In the right scenario, a rent-back agreement can be beneficial for everyone involved. But if you’re a buyer looking to move into your new home as soon as possible, or a seller looking to minimize monthly expenses, you may want to think again before signing on the dotted line.

Before entering a rent-back agreement, be sure to consider all the potential risks and rewards alongside your personal and financial situation. Work with an attorney to protect your best interest, and make sure you fully understand the agreement before signing.

Riddled with other questions about buying or selling a home? Explore our Home Buyer’s Guide to continue your education!

Katie Ziraldo

Katie Ziraldo is a financial writer and data journalist focused on creating accurate, accessible and educational content for future generations of home buyers. Her portfolio of work also includes The Detroit Free Press and The Huffington Post.