Pros and Cons of a Rent-Back Agreement When Selling a Home
SOURCE: Homes
Timing can be tricky when buying or selling a home. A rent-back agreement — sometimes called a leaseback agreement or seller occupancy agreement — provides flexibility on when the home seller moves out and the buyer moves in.
What Is a Rent-Back Agreement?
A rent-back agreement is a legally binding contract that lets the seller remain in the home for a temporary period after the sale is finalized. It’s similar to a rental agreement: the seller typically pays a monthly or daily rent and must move out by a specific date.
Rent-back agreements are common in hot real estate markets. A buyer may add one to the purchase agreement to make their offer more attractive, or the seller can request one during contract negotiations.
How Does a Rent-Back Agreement Work?
A rent-back agreement defines the terms of the seller’s stay in the house, functioning like a lease agreement between a landlord and tenant. Some sellers might make the sale contingent on a rent-back agreement, or they can request one at any point before closing.
In many cases, your real estate agent can add an addendum for a rent-back agreement to the sales contract. In other cases, the agreement might be drafted by a real estate attorney.
Most rent-back agreements will set terms for:
Rental Period: The time the seller can live in the home is usually capped at 60 days after closing.
Rate: The daily or monthly rent the seller must pay the buyer to stay in the home. Sellers might ask for a free rent-back. Buyers can also offer a variable rate, such as free for the first 30 days and a daily fee afterward.
Security Deposit and Damages: The seller will commonly be asked to pay a security deposit to cover possible damage during the rent-back period. The agreement will also define who’s responsible if major damage occurs to the home.
Maintenance: Details on who will care for home maintenance, like lawn upkeep.
Insurance: The party responsible for insurance will be defined. The seller’s homeowners insurance might no longer cover them, and they could be required to buy renters insurance.
Other Payments: The agreement will also specify who covers the utility bills and other fees during the rent-back period.
Miscellaneous Items: The buyer can write other conditions into the contract. For example, they might want to make repairs during the rent-back period or start storing items in the garage.
Eviction: The agreement should outline the terms and procedure for eviction.
Both the buyer and seller should work with their agents to negotiate the rent-back terms.
Benefits For Buyers
A more attractive offer: “In a competitive market, buyers need to be flexible, and a rent-back agreement is something they can offer that doesn’t cost them much,” says Susan Larson, a real estate agent with eXp Realty in Seattle, Washington.
Unexpected income: The rent you charge the seller can be used to offset your closing costs or moving expenses.
Benefits For Sellers
More time to move: If you need to make complicated moving arrangements, like moving to a different state, a rent-back can give you extra time.
No need to move twice: If your future living arrangements are still being ironed out, a rent-back agreement means there’s no need to find temporary housing or a storage unit.
More time and money for your home search: If you’re still looking for a new home to buy, a rent-back agreement will give you more time to search, and you can use the profit from the sale toward your down payment or closing costs.
Kids can finish the school year: Depending on when you sell, a delayed move can mean your kids don’t have to change schools during the school year.
Potential Drawbacks For Buyers
Potential for damage: In most cases, the seller will be financially responsible for damage, but you still have to deal with the headache of waiting for repairs.
The seller might need more time: Even with a well-written contract, the seller might request to stay longer, which could require renegotiating the contract.
You’re a landlord: You become responsible for a tenant and must follow your state’s landlord-tenant laws, including eviction. “In a worst-case scenario, the seller doesn’t do what the contract says, and the buyer has to take legal action,” Larson says.
Potential Drawbacks For Sellers
Additional expenses: A buyer might charge high fees to encourage you to move out sooner.
Wear and tear: If something happens to the house while renting it back, you’re responsible for the cost.
You might need renters insurance: Home insurance typically won’t cover damages during rent-back periods.
Legal Considerations
When buyers and sellers enter a rent-back agreement, the buyer becomes a landlord and the seller becomes a tenant.
Each party has certain legal rights depending on their state’s laws, which should be considered when drafting the agreement’s language.
The buyer’s lender might need to approve the contract to ensure it doesn’t violate the loan’s terms.
Lender Approval Might Be Required
In most cases, sellers can’t rent the home for more than 60 days under a rent-back agreement, but this can vary by state.
Lenders typically require the home to be “owner-occupied” when issuing a mortgage for a primary residence, meaning the buyer must live there.
If the seller stays past 60 days, the lender might legally consider the house an investment property and require refinancing with higher interest rates and different terms.
Check Your Homeowners Insurance
Many home insurers cancel the seller’s policy at closing, though the seller can request an extension. While the buyer’s homeowners insurance will go into effect, it may not cover the seller. In these instances, the buyer will likely need to insure the home as a rental property during the rent-back period, and the seller may require renters insurance.
How to Draft a Rent-Back Agreement
Your real estate agent or attorney will work with you to draw up the agreement. If you need a rent-back period when you list, your agent should include that detail in the listing so buyers are prepared to accept those terms. The buyer and seller can negotiate a rent-back agreement at any time before closing. If you agree to the terms, make sure your lender approves the contract.
Alternatives to a Rent-Back Agreement
Seller In Possession Form: This is a less-detailed version of a rent-back agreement that’s typically only used for rent-backs of 30 days or less.
Short-Term Rental: The seller can move into temporary housing while they wait to close on their new home. In a seller’s market, the buyer could offer to pay a certain amount toward the seller’s short-term rental costs.
Delayed Closing: The buyer and seller can agree to delay closing so the seller has more time to prepare for their move.
Is a Rent-Back Agreement a Good Idea?
A rent-back agreement can be a good idea, but it can also have drawbacks. “Both sellers and buyers need to understand the risks as well as the advantages and make sure the contracts are clear,” Larson says. An experienced real estate agent can help you set terms that work for you.
SOURCE: Homes
