For the past few years, these creative arrangements have been used more and more. In essence, a rent-back agreement is a short-term rental agreement between a home seller and buyer that allows the seller to remain in the home for a period of time after the closing in exchange for rental payments. Basically, the seller temporarily becomes the tenant and the buyer becomes the landlord. When we say “short-term”, that can mean a day or up to several months depending on the circumstances. Most often this kind of arrangement is executed in order to allow the sellers more time to find new housing or align with the settlement of another transaction.
A rent-back agreement can have advantages and setbacks for both the buyer and the seller. Before deciding if it’s right for you, you should talk it through with your real estate agent. Let’s look at some of the pros and cons for both parties.
Benefits for the Seller
If the seller cannot purchase without selling, this allows them to free up cash so they can be more competitive when they go to place an offer on their next house. This is by far the biggest benefit to this arrangement.
More time to make a move: a rent-back agreement can provide you the ability to find your new home while you retain the comfort of knowing your current home is sold
Avoid moving multiple times: 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 next home.
Flexibility for life events: You can’t always control exactly when your house will sell, so an arrangement like this could, for example, allow you to stay in your home long enough for children in school to finish the year before moving.
Benefits for Buyers
Agreeing to a rent-back could make your offer more enticing: If the seller happens to be in need of this and the buyer is willing to agree, offering a rent-back may make the offer stand out more to the seller. After all, “where are we going to move to?” is a burning question for many sellers right now.
Extra income: The income you make from collecting the rent payments could greatly help in covering your first several mortgage payments. This concept is not new to anyone out there who is a landlord. Nothing beats having others pay down their debts even if it is only for a couple of months.
Saving money elsewhere: If the seller is in strong need of a rentback agreement, you may be able to leverage that into other areas such as lower closing costs, appraisal fees, inspection fees, etc.
Risks for Sellers
Increased monthly payments: Renting the home could end up costing more than you were paying for your mortgage.
No permanent changes allowed: while you are renting back, you will not be able to make any changes to the property.
Potential loss of security deposit: If damage happens to occur during the rent-back period, you run the risk of losing your security deposit. This is especially true when sellers are moving out of the property. Be sure the agents write up a strong detailed agreement between parties.
Risks for Buyers
Delayed move-in: This is kind of obvious, but of course, the buyer will not be able to move into their new home until the rent-back period has ended.
Acting landlord: While the seller is renting back the property, you are now their acting landlord. This can come with several added responsibilities, such as drawing up the lease, collecting the rent, coordinating repairs, and even potentially evicting the seller if necessary.
If you are a buyer looking to move into your home right away, or if you are a seller looking to minimize expenses, you may want to think twice before entering into this kind of arrangement. Keep in mind also that some lenders won’t look fondly upon this type of setup so it is important that your agent knows how to navigate this process.
We have successfully coordinated several rent-backs and are happy to answer any questions. It really can be beneficial to everyone involved if done properly.