Moving homes is hard enough, but it becomes more complicated when you’re juggling the timing of selling one home in order to move into a new one. Buyers typically agree to give the seller a week to 10 days to move out after closing on a home, but that may be easier said than done.
The timing hurdle is a challenge for sellers and buyers alike, which is why rent-back agreements can be a valuable tool. Essentially, a rent-back agreement gives sellers extra time to live in a home after closing by paying rent to the new buyer.
Rent-back agreements have benefits for both buyers and sellers, which makes them especially useful for anyone who is trying to sell before they buy.
A rent-back agreement is a rental or lease agreement that states that a seller may continue to live in the home they just sold for a certain amount of time after closing. The seller becomes the buyer’s tenant, paying rent until they find a new place to live.
Most of the time, these are short-term deals as sellers may just need a little time to close on their next home. A seller may also have school-aged children and want to ensure they can finish out the school year before having to move. Sometimes, these agreements may be longer-term if sellers love their home but want to cash out equity by selling to an investor.
Not all rent-back agreements are premeditated. If a seller realizes that they’ll need extra time to find a new home before the buyer moves in, they can request a rent-back agreement any time before closing.
The details of the rent-back agreement, then, should be disclosed in a signed document written into the closing documents. This agreement should dictate the term of the rent-back agreement, the rental payment, and determine who is responsible for maintenance, utilities, and other costs during the course of the agreement.
Generally the process plays out like so:
If the seller would like a rent-back agreement, both parties should consult with a real estate attorney to help negotiate and formalize the agreement. Additionally, buyers must notify their lender. Most lenders will approve a short rent-back of up to 60 days. Anything longer than that and you may need to go through a special approval process.
At closing, both buyer and seller will sign the legally binding rent-back agreement that spells out the terms of the agreement. A rent-back agreement usually includes:
As mentioned before, rent-back agreements rarely last longer than 60 days. Most lenders won’t approve a longer rent-back agreement because insurance companies limit how long they’re willing to extend homeowners’ insurance for a seller who doesn’t technically own the home anymore. Plus, new owners can’t wait forever to move into their own home.
Rent-back agreements can also last as short as a few days. Once the term is over, the seller must move on to their next home. If the seller does not move out on time, the buyer has the right to evict.
This type of workaround agreement is typical of the traditional way of buying and selling a home at the same time. In some markets, you can work with Orchard to buy your new home first, then sell your old one — so there’s no awkward “renting your own home” stage.
A rent-back agreement has a few key benefits for sellers. Those include:
Rent-back agreements can be beneficial for buyers, as well. Some of the key benefits include:
The biggest risk of rent-back agreements for sellers are related to being a little too familiar with homes that are no longer their own. Some issues that may arise include:
Buyers are getting paid during a rent-back agreement but that doesn’t mean there aren’t drawbacks. Some of the most common disadvantages include:
Rent-back agreements have benefits for both buyers and sellers if constructed well and upheld honestly. If you as a buyer have a little flexibility with your moving timeline, it can be a financially smart decision to offer a rent-back agreement to a seller. As a seller, a rent-back agreement gives you some more time to find a new home. Make sure to discuss this option well before closing day, however, and let your real estate attorneys handle the fine print.
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