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October
20

Learn the Pros and Cons of a Rent-Back Agreement When Selling or Buying a New Home

If you're buying a new home while selling your current one, it's a good idea to get familiar with something called a rent-back agreement. Timing-wise it can require some good luck to get it right if your home sells before you've closed on your new one or even found a place. Without a rent-back agreement, your choices are couch-surfing or paying to stay in a hotel. Either way, you'll have to move twice... and no one wants to do that!

A rent-back agreement gives you, as the seller, a third choice. With a signed rent-back agreement, you will have extra time to live in the home after closing. It essentially gives you the right to become the new buyer's temporary tenants. Most don't last long – there are typically time limits built into the agreement – but it gives sellers a chance to close on their new home, pack up, and arrange for the big move.

For the buyer, offering a rent-back agreement can also provide a couple of serious benefits. For example, in a competitive market, an offer that's flexible on move-out dates can give you, as the buyer, an edge. Plus, the rent the seller will pay can help you recoup those hefty closing costs. 

When it's done right, a rent-back agreement can be a win-win for everyone.That being said, there are a few considerations before you jump in the pool!

What Exactly is a Rent-Back Agreement?

A rent-back agreement is a legally binding agreement made in writing between the seller and the buyer with terms much like a leasing agreement between a landlord and a tenant. However, some issues can get a little tricky, so it's crucial to understand how one works.

Essentially, the seller becomes a tenant in their old home, and the buyer becomes a landlord for the home they are about to possess, possibly with no experience.

The typical rent-back agreement covers the basics in a few areas:

• Terms and Possession

Before closing, all of the details of a rent-back agreement need to be worked out, including how the rent will be paid, what it will cost, and when the seller/tenant will move out. As a buyer, you just can't assume that the seller will agree to anything or behave as you expect just because you bought their home. The rent-back agreement needs to be written up with the same care as the purchase contract. While it is not common, you should make sure you understand the eviction laws where you purchased, just in case the seller decides they're going to stay as long as they can.

• Rent, Security Deposit, and Late Fees

Like any rental agreement, the buyer/landlord can collect a refundable security deposit. Both buyer and seller need to agree to fair market rent. At closing, the buyer pays closing costs, and the seller pays a security deposit and upfront rent. After the close, the buyer gets the keys, and the seller stays in the home. 

• Utilities

The agreement needs to specify which party is responsible for utilities. Usually, sellers will have the utilities switched to the new buyer at the close. However, in a rent-back agreement, it may be in the buyer's best interest to have the seller keep the utilities in their name and continue to pay them.

• Entry Rights

Make sure to cover the right to enter is in the rent-back agreement. If the buyer wants to begin painting or making any changes to the home while the seller is still living there, they will need to give proper notice, typically 24-hours, before entering the home.

• Maintenance

The agreement should also cove who is responsible for maintaining the interior and exterior of the home. Maybe the seller will continue doing the yard work, but if the stove or refrigerator stops working, the seller will call the landlord to get a new one. Specify maintenance to make sure there is an understanding for handling any unforeseen circumstances.

• Insurance

The new owner will have to have insurance coverage as per the lender's requirement – and because they are the new owner. However, the owner's insurance won't cover the tenant's possessions, so your agreement will need to include terms for the tenant to carry renter's insurance. As the buyer, include the right to ask for proof of insurance.

• Inspections

The new owner should walk through the property before the close to note its condition. Take photos to document. Do another walk-through upon taking possession at the end of the seller's rental term to determine any damages that may require compensation which can be taken from the security deposit.

The Pros and Cons of a Rent-Back Agreement

There are positives and negatives both for the buyer and the seller with a rent-back agreement. Here are a few to consider:

For the Seller:

A seller might want to consider a rent-back agreement if there is a significant gap between closing on the sale of their home and the purchase of their new home. In a tight market, getting some additional time to find your dream home can be a lifesaver. While a rent-back agreement is typically short-term – 30 to 60 days, that extra time can often make a big difference. On the downside, while you're still in the property, you need to remember that it isn't yours anymore. Technically, you now have a landlord. That means if you cause any damages, are late with the rent, or vacating the property, you may be liable and held financially responsible. 

For the Buyer:

If you're not in a hurry to move in, a rent-back agreement can be a factor in landing you your dream home. It is a way to make your offer stronger and stand out to the seller. However, there are some factors to consider since you are now technically a landlord. This means that you may be responsible for any repairs, for example, replacing a broken water heater or fixing a broken stove. And you may need to make the repairs immediately. You also need to be concerned that the sellers will move out on time. They rarely drag their feet, but it does happen. If it does, you may need to go through the legal process of having them evicted.

The Bottom Line...

All that being said, when properly and thoughtfully executed, a rent-back agreement can be a win-win situation for both the buyer and seller. Your REALTOR® and attorney can help guide you to create a proper rent-back agreement that is fair and beneficial to both parties. Just make cover all the bases and make sure that the terms of the agreement are very specifically spelled out. 

If you treat this situation like you would any other business relationship you should be ok. Buyers should never let sellers retain possession of the home without a formal occupancy agreement. A well-written agreement will protect both the buyer and the seller. 

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