How rent-back agreements work | Terms of a rent-back agreement | Tax consequences | Is a rent-back agreement right for you? | FAQs
A rent-back agreement (also known as a lease-back, post-settlement occupancy agreement, or seller's temporary residential lease) is a legally binding contract that allows a home seller to temporarily remain in their home, usually for up to 60 days AFTER closing on the sale.
This can provide sellers with additional time to find a new place to live. The buyer acts as a landlord, collecting rent until the seller formally moves out.
Rent-back agreements can be beneficial for both buyers and sellers. If the seller isn't in a hurry to move, a rent-back agreement can help them buy time to find their next home. At the same time, buyers can use these to make their bids more competitive. BUT rent-back also comes with some baggage for both buyers and sellers.
Considering whether a rent-back agreement would work well in your situation? An experienced local real estate agent is your best asset in these scenarios. They can help explain the terms and write a rent-back agreement that works for all sides of the deal. Find a top local agent now!
How rent-back agreements work
Setting one up | Establishing terms
After the buyer and seller sign the rent-back agreement — meaning they agree to its terms AND include it as a contingency in sale — and close on the home, the seller becomes the renter and the buyer now acts as the landlord. The rent-back agreement functions as a formal contract, similar to a temporary lease or rental agreement.
As the new property owner, the buyer is often responsible for maintenance and repairs, though the terms of the rent-back agreement vary.
A rent-back agreement changes the relationship between the buyer and seller. While that relationship doesn't have to be complicated, we recommend getting advice from a real estate professional, attorney, AND an accountant before moving forward.
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Steps to create a rent-back agreement
- The buyer OR the seller can propose a rent-back agreement, depending on the circumstances of the sale, the local real estate market, and each party's needs.
- If both sides are open to a rent-back, they need to negotiate the terms of the agreement. If the rent-back term is shorter than 30 days, the buyer and seller can use a seller-in-possession (SIP) form to streamline negotiations. Many states offer a simplified SIP (here's California's).
- The buyer notifies their lender about the rent-back agreement. Lenders typically allow short rent-backs of up to 60 days, but it's critical to consult with them regarding approval and any restrictions.
- When all of the details are finalized, the parties sign the purchase agreement (with the rent-back contingency) close on the home sale.
- As the homeowner, the buyer is now legally a landlord; the seller now acts as a conventional renter. This relationship remains in place until the end of the rent-back period, when the seller is required to move out of the home.
❗️ Buyers and sellers should work with a realtor AND an attorney with experience in rent-back agreements. While the terms of the agreement might not be complicated, it's still a legally binding contract that would benefit from an expert's careful review!
"If something goes wrong, and you need to negotiate with the other side, the buyer or seller can be really at a disadvantage if they're not represented by an attorney," says Shane Zisman, an attorney in Iowa.
When might a rent-back agreement make sense?
A rent-back agreement might be a good option for sellers who:
- Are building a new home and dealing with construction delays
- Have kids in school and want them to finish the year before switching districts
- Haven't yet found a new place to live
What's covered in a rent-back agreement?
Similar to a conventional rental agreement, a rent-back agreement addresses the cost of rent, utilities, and the security deposit (including the amount), plus who will pay for the home insurance and other items.
If one party violates any of these terms — like if the seller doesn't pay rent — the other party has the right to pursue damages.
Length of rental period
Rent-back agreements are almost always shorter than 60 days — exceeding this brings some serious complications for the home buyer.
Lenders commonly require buyers to occupy their homes within 60 days of closing.
If a buyer fails to move in within this time frame, the lender might mistake this home purchase for an INVESTMENT purchase and seek changes to the home loan to reflect this, like a higher interest rate.
Some states provide seller in possession forms, which buyers and sellers can use for rent-back agreements shorter than 30 days. These outline all of the terms you need to negotiate for a rent-back agreement: rent, a security deposit, length, etc.
Need to sell fast, but not ready to move?
Some real estate companies, like EasyKnock and Sell2Rent, will make a cash offer on your home and allow you to rent it for longer than 60 days — up to a year after closing.
This kind of lease-back service works best for sellers who need cash quickly AND the extra time to find their next home. However, some of these companies don't have a great track record, and you could be taking a big risk by selling to them.
Rent
Usually, the buyer will set a rent amount that reflects their monthly cost of homeownership. While they won't be occupying the house, they'll still have to make monthly payments on it (e.g., their home loan, HOA fees).
There's no "correct" way to calculate how much to charge the seller, but buyers often consider these factors:
- Mortgage principal
- Interest
- Property taxes
- Home insurance
Another common benchmark is the current average local rent, which may be less expensive.
Instead of charging rent, the buyer can ask the seller for a reduced price on the home or to cover all closing costs in exchange for temporarily staying in the home. However, that can complicate your taxes.
If you're a buyer, discuss these options with the seller and an attorney — and get it in writing!
Other terms of renting back
Rent-back agreements also need to address other items that you'd find in a conventional rental agreement.
💰 A security deposit can assure the buyer that their home will be in the same condition when they eventually move in.
💡 Utilities may be easier for the seller to handle, as their name is likely still attached to the electric and gas bills. But either the buyer or seller can pay utilities.
🛠 Maintenance and repairs are usually paid for by the buyer, since they're acting as the landlord.
🏠 Home insurance is typically paid by the home buyer, since they now own the property. But they can roll the cost of this into what they charge for rent.
⛔️ Entry into the home is a potential sticking point while negotiating a rent-back agreement. While the buyer now owns the home and may want to begin moving in some items, the seller still lives here and has some claim to privacy. Outlining when and where the buyer can enter the property can avoid conflict.
Will a rent-back agreement complicate my taxes?
If you're a home buyer, a rent-back agreement requires you to report any rental income as "Other Income" on your taxes.
Usually, a homeowner needs to report rental income on a Form Schedule E for "Income and Loss from Rental Real Estate." However, this applies more to long-term rentals (i.e., for rental periods LONGER than 60 days).
Sarah York, enrolled agent with the IRS, explains: "Schedule E is for ongoing rental properties that you intend to make a profit with, whereas a rent-back arrangement is a one-time, temporary deal." She warns, "Trying to use this approach with a rent-back agreement could get you into trouble with the IRS."
For short-term rent-back periods, buyers should report rental income as "Other Income," not on a Schedule E.
Forgoing collecting rent in exchange for a lower purchase price could also affect your taxes in the future.
"A lower purchase price will only mean higher capital gains when you sell down the road," says York. Instead, she advises declaring rent you'd collect as "Other Income" to avoid any hairy situations with the IRS.
How a rent-back agreement can impact your home loan
If an agreement exceeds 60 days or if the seller otherwise doesn't vacate by this point, your lender might recategorize your home purchase as an investment purchase and ultimately seek costly changes to your mortgage. That can be hard to reverse.
Is a rent-back agreement right for you?
Rent-back agreements can be useful, whether you're the buyer or the seller. But they do come with some risks for both sides.
One of the main risks for buyers is the potential for property damage or additional costs, as the seller may not have the same incentive to maintain the property. Rent-back agreements can also create complex legal and financial arrangements, which can be challenging to navigate.
And for both buyers and sellers sellers, there's a risk of eviction if they can't vacate the home at the agreed-upon time. This can be legally complex and emotionally draining.
| A rent-back is RIGHT for you if you want… | A rent-back is WRONG for you if you don't want to… | |
|---|---|---|
| Buyers | ✅ A more competitive bid✅ Lower overall cost of purchasing the home✅ A low-stakes way to try being a landlord
✅ More time to move out of your current home |
❌ Have added responsibilities of being landlord❌ Worry about the seller moving out by the agreed-upon date or about the potential for property damage❌ Complicate the terms of your home loan
❌ Wait to move out of your current home |
| Sellers | ✅ More time to move into your next home✅ More time to search for a new home✅ To avoid finding temporary housing between homes | ❌ Pay rent❌ Pay a security deposit❌ Have a landlord |
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FAQs about rent-back agreements
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How much is rent in a rent-back agreement?
This is negotiated by the buyer and the seller. It often reflects what the buyer will pay monthly on their mortgage. The buyer could also forgo collecting rent and opt for a lower price on the home purchase.
How long can a seller rent back their home?
A rent-back period is negotiable. However, they almost never exceed 60 days. If it's longer, the buyer might complicate their home loan with their lender.
Can rent-back agreements fall through?
While rent-back agreements usually work out for both buyer or seller, there are a number of reasons why they might fall through, including lender restrictions, unexpected circumstances, a change in buyer circumstances, and other potential problems.
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Why trust us?
This piece required dozens of hours of research from Clever's research and editorial teams.
We also talked to real estate and tax experts to give readers a better understanding of this topic, including Sarah York, an enrolled agent with the IRS and a staff writer for Keeper Tax.