Imagine you’re about to sign a contract to sell your home when you get word that construction on your new home has been delayed two months. The closing process is expected to take about a month, so that leaves you without a home for 30 days. Once you overcome the initial shock, mulling over your housing options is a must. One option to consider is negotiating a rent-back agreement with the buyer. Let’s take a look at what a rent-back agreement is and the pros and cons associated with it.
What is a Rent-Back Agreement?
A rent-back agreement is a legally binding rental agreement between a home seller and buyer that allows the seller to remain in the home after the close of escrow in exchange for rental payments. Essentially, the seller becomes a tenant and the buyer takes on the role of a landlord. The rent-back agreement is short-term, generally lasting between one to six months. Most often the agreement is executed to allow sellers more time to establish new housing or buyers more time to move. Common reasons for housing delays include: (1) new construction interruptions; (2) time constraints for moving out of state; (3) low housing inventory; and (4) a shortage of moving trucks.
Before closing, the terms of the tenancy relationship are outlined in the rent-back agreement. It should consider the landlord-tenant rights in the state where the property is located. If the buyer is financing the home, it’s more than likely the lender will also need to review and sign off on the terms. When executing a rent-back agreement, here is a list of terms to consider:
Possession. The length of the rental period, or time the seller will remain in possession of the property, and the ramifications if the seller remains in the property past the specified date.
Rent, security deposit and late fees. The parties will need to agree on a rental payment that is determined based on a fair market rent calculation. Like any other rental agreement, the buyer can collect a refundable security deposit and establish late fees. To note the condition of the property, a walk-through inspection is often conducted at the beginning and end of the rental term. If the property has been damaged or is unusually dirty, the buyer may keep all or any part of the deposit to repair the damage and clean the property. The buyer may also keep any portion for nonpayment of rent or utilities.
Maintenance. The interior and exterior maintenance responsibilities should be summarized in the rent-back agreement, such as the seller’s duty to properly use, operate and safeguard all appliances and the obligation to maintain the landscaping. The rent-back agreement should also outline the notification process for any problems, malfunctions or damage that occurs and the recourse for not doing so in a timely manner.
Utilities. Outstanding utility bills are generally paid in full during the closing process before switching out the seller’s name. It may be in the best interest of both parties to keep the utilities in the name of the seller and have them continue to make the payment during the extended time they will inhabit the property. Some utility bills may automatically transfer to the buyer, so it’s best to specify how all utility matters will be handled in the rent-back agreement.
Insurance. The buyer generally purchases homeowner’s insurance to protect the home and belongings from damage or loss due to unforeseen hazards. The lender most likely will require it to protect their investment. But the buyer’s insurance policy will not cover the seller’s belongings, so the rent-back agreement may include a requirement for the seller to obtain renter’s insurance.
Pros and Cons of a Rent-Back Agreement
A rent-back agreement can have advantages and setbacks for both the buyer and the seller. Before deciding if it’s right for you, it may be worth discussing with your real estate agent and perhaps a real estate attorney. And if you’re the buyer, you’ll want to make sure your lender is on board and you have that in writing. Let’s take a look at the common pros and cons for both parties:
If there is a considerable gap between the closing on the sale of your home and the purchase of your replacement property, a rent-back agreement may be something to consider. The extra time in the home can be used to execute your move in a productive way, avoiding moving more than once.
During the rent-back period, you’ll need to remember that the property is no longer yours. That means you won’t be able to make any permanent changes, and if any damage occurs, you may be required to relinquish some of your security deposit to cover it. You may also be held financially responsible for late fees, should you not remit payment on time or vacate the property on a date that is contrary to the rent-back agreement.
If time is not an issue and you’re in no rush to move in, agreeing to a rent-back agreement can be an attractive option for a seller who needs more time to move. Yet, you’ll also need to be ready to play the role of landlord. That means you will be responsible for making necessary repairs and collecting a monthly rent payment. The good news is that the money you collect in rent could be used to offset your mortgage payment and perhaps even some of your recent closing costs. If the seller doesn’t make payments or fails to move out on time, you may need to go through the legal process of having them evicted.
The Bottom Line: Weigh the Pros and Cons
Before you take the leap of negotiating a rent-back agreement, weigh the pros and cons and talk to your real estate professional, lender and attorney. If you decide to move forward, it’s important to make sure everything that needs to be addressed is accurately outlined. Doing so will help you avoid unwarranted mishaps. When you’re ready to close on your home or purchase a new one, Old Republic Title will be here for you with products and services designed to protect your transaction.