Imagine that you’ve sold your house for the price you were hoping for and are getting ready to move into your new house—only to find out that the renovations are taking longer than planned. Suddenly, you have a few days to a week with no house. While you could couch surf or hole up in a hotel, why not propose a rent-back agreement instead?
What is a rent-back agreement?
A rent-back agreement allows the seller to stay in the home for a “rent-back period” of up to 60 days while the seller pays rent to the buyer. (Any longer than that and the buyer could face tax consequences and issues with their lender.) Rent-back agreements give the seller extra time to move and help the buyer recoup some of the money they spent at closing costs.
A recent study from the National Association of Realtors found that 16% of home sellers used a rent-back agreement to stay in the home while they worked on their new living arrangements.
The rent-back agreement can be beneficial to both the buyer and the seller and can be the deciding factor on which offer to accept. If the seller needs to rent back the house, they will naturally more seriously consider the buyer that is willing to enter into that agreement with them.
If you as the buyer are not comfortable with a rent-back agreement, you may be able to get out of the contract.
How does a rent-back agreement work?
It’s fairly simple: The seller and buyer sign an agreement that the seller will remain in the home and pay rent to the buyer, who now actually owns the home. The sellers must keep the house in the same condition as the buyer purchased it in.
Sound a little too simple? Here’s an example:
Joe and Carly Johnson sold their house to Rebecca Smith and closed on a rainy Thursday in November. It had been raining all week and the Johnsons’ new house had flooded, meaning they couldn’t move in as planned.
Rather than move all of their possessions into a storage unit and live in a hotel while the mess was getting cleaned up, the Johnsons’ real estate agent suggested a rent-back agreement. Rebecca agreed to the rent-back since she wasn’t planning on moving into the house for a few weeks anyway.
Right before closing, Rebecca was invited to enter the property to make sure it was in the same condition it was in when she made the offer. She had her real estate agent draft up the rent-back agreement—also known as a Seller Post Settlement Occupancy Agreement—that included a security deposit, just in case the house was in worse condition after the Johnsons moved out.
Rent-Back Agreement Cost
The agreement also stated the rent rate, which was equal to Rebecca’s mortgage payment, principal interest taxes, and insurance. It was prorated for three weeks, which was the amount of time the Johnsons said they would need to sort out their new home.
The agreement advised the Johnsons to “consult with an insurance agent regarding coverage.” After talking to their insurance agent, they agreed to get renters insurance, which was about the same rate as their homeowner insurance policy. Rebecca also insured the home under her own homeowner insurance policy, which she included in the rent amount.
Should you consider a rent-back agreement?
All in all, the process worked out for both parties: Rebecca was able to recoup the money she would have spent before she even moved in, and Joe and Carly were able to have a familiar place to live and only move their items once.
The Johnsons received their deposit back—but that’s not always the case. If the seller has done any damage to the property, the buyer is within their rights to withhold the deposit.
If you decide to sign a rent-back agreement or to simply allow the seller to stay in the property for a few extra days, experts advise you to get it in writing. Even something as easy as an email can provide the added security if it comes down to a legal battle. Check with your real estate agent if you have any questions about a rent back agreement.
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Thinking about initiating a rent-back agreement? You’ll want an expert real estate agent by your side to make sure you have protection. Instead of paying a bucketload of money to a full-fee real estate agent, get a local expert for a low flat rate through Clever. Call us today at 1-833-2-CLEVER or fill out our online form to start.