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You’re getting ready to sell your home, and the market is hot. While that’s good news for your sale, there might be one challenge: You need to find a new place, too. One solution is to sell your home and become a tenant by signing a rent-back agreement.
Rent-back agreements are common tools in real estate transactions, but they come with upsides and downsides for both parties involved.
What is a rent-back agreement?
A rent-back agreement is when the buyer agrees to purchase the home and immediately rent it back to the seller.
Let’s say that Ron is buying a single-family home from Lisa. Ron’s offer includes the option for Lisa to rent the home after Ron has finished the closing process and officially becomes the homeowner. For a specific time outlined in the purchase contract, Lisa would now be a tenant, and Ron would now be a landlord.
How does a rent-back agreement work?
Lisa can’t be a tenant forever in her old home. Instead, a rent-back agreement is designed to make the transition for the seller a bit smoother by eliminating the need to immediately find a new home.
“If the seller isn’t going to turn around and buy a new home in cash, they’re going to need some time,” says Tina Pierret, a broker and agent at Fridrich & Clark Realty in the Nashville, Tennessee area. “For example, an extra 45 or 60 days to stay in the home after closing day is not out of line.”
The rent-back agreement gives the seller a specified period of time they can continue to live in the home. However, there is a limit, particularly if the new buyer is financing the purchase.
“Most lenders will only be able to tolerate up to 90 days for a rent-back period because after that it’s no longer an owner-occupied property,” says Pierret.
Pros and cons for homebuyers
- Pro: You can make your offer more competitive. If you can’t afford to offer the highest price for a home you really want, your flexibility to allow the seller to stay a bit longer might help make up the difference. “Price is not everything,” says Pierret. “There are usually sweet spots for the seller. A rent- back agreement is one of them.”
- Pro: You might be able to earn some extra money. Depending on the market and the length of the rental agreement, you might be able to cover some of your new mortgage payment. If the seller really needs two months after you close, perhaps they’ll be willing to pay for it.
- Con: Being a landlord is hard. What if the seller/now tenant breaks something? What if the end of the rental period arrives and they aren’t ready to move out? What if the tenant doesn’t pay on time? Now that you’re renting the property, you have to handle all the typical duties of a landlord — while also making plans to move your stuff in.
- Con: You might not actually make any cash. While a buyer might be renting the property back to the seller, there likely won’t be any money changing hands for those extra months. “If you’re in a multiple-offer situation, a buyer isn’t going to ask the seller for money,” says Pierret. “It’s a tool for the buyer to sweeten the deal.”
- Con: You will have to pay to live somewhere else. Buying comes with the gratification of having your own official place. If you’re renting it back to the seller, you have to deal with additional rental payments in your current place or find a short-term place to live. Either way, you’ll pay closing costs and then continue to pay for another property.
Pros and cons for sellers
- Pro: There’s no need for an immediate move or a storage space. “For a seller, a rent-back agreement is a no-brainer,” says David Serle, broker/owner of RE/MAX Services in Boca Raton, Florida. “They are able to stay in the house, taking away the stress of moving into a new house the same day or keeping their personal property in storage.”
- Pro: You’ll have cash for your next purchase. Instead of trying to sell your house and buy a new home at the same time — which comes with financing issues — renting back allows sellers to get their profits from a sale to “have more leverage to purchase or rent another house,” says Serle.
- Con: You need to put down a security deposit — and you might deal with a sneaky new landlord. “There would typically be a hold back security deposit of some sorts to make sure there is no damage when vacating the home,” says Serle. “Some buyers do try and take advantage at that time to try and take the deposit by claiming there is damage and such.”
- Con: You’re only buying yourself a limited amount of time. Renting your old home back ultimately only buys you a short additional window. So, don’t let the cushion of another month or two lull you into delaying your work to prepare for the move and find a new home.