Rent-back agreements: a guide

Real estate transactions are complicated – especially when you need to sell your old house and buy a new one at the same time. Some homeowners solve for this complexity using something called a rent-back agreement. In this article, we’ll cover the pros and cons (and ins and outs) of rent-back agreements. 

What is a rent-back agreement?

Just as it sounds, a rent-back agreement is a lease agreement between the homebuyer and home seller of a property, enabling the seller to rent the home and continue to live in it after the closing date. This gives everybody extra time to prepare for the big move – and offers the buyer some extra financial cushion. 

How does a rent-back agreement work?

A rent-back agreement is a rental agreement, like any other lease. Like any lease, a rent-back agreement needs to define the duration, price, and terms based upon which the seller will be staying in the home. A real estate attorney can help draw up the agreement. 

How a rent-back agreement works for sellers

The seller signs a lease that kicks off at closing. Instead of moving out when the sale closes, the seller gets to stay in the home, paying rent to the buyer. It’s just like a regular landlord-tenant relationship. There is, however, a slight twist: depending on the terms of the agreement, the funds for the security deposit and rent may be held back in escrow rather than paid directly by the seller. 

The seller gets extra time to close on their new home and move out – although the lender will generally cap this at 60 days. 

How a rent-back agreement works for buyers

The buyer works with their real estate agent to include the rent-back agreement in their offer. Once the offer is accepted, the post-settlement occupancy agreement is in place, and the closing period is complete, the buyer takes legal possession of the property. 

However, instead of moving in right away, the buyer becomes the seller’s landlord for the duration of the rent-back period. The buyer collects rent either directly or via escrow. After the rent-back period ends, the buyer moves into their new home. 

How to set up a rent-back agreement

If you are considering a rent-back agreement, there are a few important steps. 

1. Consult an attorney

Because a rent-back agreement has an impact on your real estate transaction, you should consult with a real estate attorney before moving forward – whether you are the seller or the buyer. An attorney can help draft an agreement that protects both the seller and the buyer. 

2. Notify your lender and real estate agent

Two entities need to be kept up-to-date with every aspect of your home sale or purchase: your agent and your bank. For the seller, informing your agent that you are seeking a rent-back agreement will help narrow the field of buyers to those who don’t need to move in right away. For the buyer, communicating with your mortgage lender will ensure that you are not violating the terms of your home loan – and are aware of any limits your bank may place on the rent-back period.   

3. Draft a rental agreement

You, the real estate attorney, and the counterparty in the purchase transaction need to define the terms of the rent-back agreement. These include rent, duration of the term, security deposit, responsibility for repairs, insurance requirements, whether the rent will be paid directly or via escrow, and more. Once all parties are satisfied, the agreement is signed. 

Is a rent-back agreement a good idea?

Like any other decision in the world of real estate, whether a rent-back agreement is a good idea or not will depend entirely on your own needs and circumstances. Let’s cover the advantages and disadvantages for sellers and buyers. 

Pros and cons for sellers

The pros for a seller are relatively clear-cut: 

• Sellers get extra time in their home, avoiding an extra move to a rental property between the sale of their old home and the purchase of the new. 
• This provides added flexibility for both the big move and the new purchase, meaning less stress and a better chance of landing the perfect property. 

However, the situation comes with its own share of challenges: 

• The seller, used to having the run of their own home, becomes a renter, beholden to the wishes of a landlord and liable for any damages that occur during the rent-back period. 
• Hopefully, the home has sold for more than the seller originally paid – that means the rent could be much higher than the mortgage the seller was paying on the same exact property. 

Pros and cons for buyers

We’ve covered the benefits of a rent-back agreement for the seller – but what about the buyer? Why would they want to delay moving into their new home? A rent-back agreement has several key advantages for a buyer:

• The rent covers some (or maybe even all) of the first mortgage payment(s) for the buyer, helping ease the burden of closing costs and smooth the financial transition that comes with a home purchase. 
• Offering a rent-back agreement to a seller who needs the extra time is an extra sweetener that can improve a buyer’s chances of having their offer accepted in a tight market. 
• If the buyer also has a property to sell, they get the same flexibility as the seller – extra time to wrap up the second real estate transaction without overlapping payments. 

However, there are also cons: 

• The buyer becomes a landlord, with all the risks and responsibilities that this entails.  
• Like any tenant, the seller can damage the property. Things in a house break – and as a landlord, the buyer must fix them. 
• If the seller fails to move out on time, the buyer must deal with a potentially onerous eviction process. 

Final thoughts

The road to your dream home is not always smoothly paved. A rent-back agreement can make the stressful affair of buying and selling a home simultaneously a little bit easier. However, it’s not the best idea for everyone. 

If you are looking to bridge the gap between purchase and sale, consider a Home Equity Investment from Point as an alternative option. With an HEI, you can use the equity of your existing home to cover the cost of your new home. There are no monthly payments – you’ll repay Point with a portion of the proceeds when you sell. There are also no income requirements, simplifying the DTI ratio issues that can come with juggling multiple properties. 

Learn more about HEIs and see if you qualify today.