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“But I’m buying a home to live in it!” You might say when your agent suggests offering a rent-back agreement. “Why would I let the seller rent it back after closing?” Good question. And the answer is: a rent-back agreement could help you win the home of your dreams.
Amy Christman is an experienced agent in Vancouver, WA who works with 73% more single-family homes than the average agent in her area. She says that in the last few years, “they’ve been prevalent because buyers were desperate to get into houses because of the multiple-offer situations on most homes.” A rent-back period often appealed to sellers, and made the buyer’s offer stand out.
If you’ve been making offers on houses and not winning, or just want to write a great offer to begin with, here’s what you need to know about rent-back agreements.
What is a rent-back agreement and how do they work?
When a buyer offers a seller a rent-back agreement, they’re essentially becoming a landlord. A rent-back period allows the seller to stay in the house for a specified period of time after closing. You own the house, it’s legally yours, your name is on the title — but the seller doesn’t have to move out yet.
After closing, you shift from a buyer-seller relationship to a landlord-tenant relationship. Christman says that a rent-back agreement allows buyers to, “Lock in their interest rate and lock in their home, and it gives the sellers a cushion of not having to move twice, plus they have the money to buy another home.”
In a hot market, buyer’s agents might reach out to the selling agent to ask what would make their buyer’s offer more attractive. In some cases, Christman saw sellers accept offers with rent-back agreements instead of offers for more money that didn’t include one. The buyer’s and seller’s agents negotiate its terms, which could include how long the seller can stay, how much they’ll pay per day to remain in the home, or if they are waiving a daily rate.
Some agents will have pre-printed forms for the seller to sign, while others might include the rent-back’s terms in your offer letter. You should always get the terms in writing so you have an enforceable legal document if something goes wrong.
Why would a seller want a rent-back agreement?
It’s no secret that it’s been a seller’s market in most areas for the past few years. Christman says that with sellers receiving ten or more offers, many over list price, “buyers were doing everything they could to entice the seller to take their offer. A lot of times, the long rent-back period or a free rent-back period won them the offer.” But, why would a seller want to stay in a home they’ve sold?
To have a little extra time to move out
Many sellers might be selling for top dollar during a great market… but then they also have to buy their new home in that same market. The rent-back period gives sellers time to shop with the money from their current home in hand. “It’s really becoming challenging to get a contingent offer accepted,” Christman says. Without a rent-back period, the seller is “going to have to write the offer subject to their home selling,” which decreases the likelihood of their offer being accepted.
If they are waiting for their new home purchase to close
It’s also taking longer to close on homes. In addition to offering rent-back periods to sweeten the deal, buyers have also been giving sellers extended close dates. This can have a domino effect — at one point, Christman had four buyers and sellers waiting for the first “domino” (or home) to close.
If they are waiting on their new build property to be completed
The same is true if the seller is moving into a new construction home. They might not have a place to go after closing, and construction delays could leave them temporarily homeless. An open-ended rent-back period might give sellers who are buying new construction some flexibility and peace of mind.
Components of a rent-back agreement
A rent-back agreement is a legally binding contract between two parties. While the terms may vary, it should address all of the following.
While Christman did see some buyers offer sellers the ability to stay for free, she says that it’s more common to charge a daily rate.
“You take 1/30th of PITI — principal, interest, taxes, and insurances — everything that goes into a buyer’s payment to get a daily rate. Then multiply it by however many days the seller is staying,” she explains.
For example, a $5,000 per month mortgage payment that covers PITI divided by 30 days is $166.67 per day. If the seller plans on staying two weeks, they’d pay $2,333.38. But — how will they pay? After all, you probably didn’t start home shopping to end up worrying about collecting rent.
It’s most common to negotiate to have the rent and the seller’s security deposit held back at the closing. In Christman’s state (Washington), the title or escrow company will “collect the daily rent up front at escrow (usually) and hold those funds plus the deposit.”
Christman thinks that the security deposit is a buyer’s biggest safety net with a successful rent-back agreement. At closing, if the seller would have received $50,000 in proceeds, the title company would hold back rent plus the deposit. The seller will want that money back, so they’re more likely to comply with the agreement’s terms.
Before agreeing to a rental period, check with your lender. Lenders don’t typically allow rent-back agreements longer than 60 days. While a rent-back period can be as little as a few days up to a few months, check that you won’t be in violation of your mortgage’s terms.
Your homeowners insurance might also require different clauses, or notification that you’re not yet occupying the house. This is because landlords carry different coverage and often receive higher rates on loans. Even if it’s temporary, you don’t want to run into legal trouble.
Once you’re the home’s legal owner, you’ll need homeowners insurance. According to Christman, “the new owner is responsible for the structure, the former owner is responsible for their belongings.” Talk to your agent about requiring the seller to obtain renter’s insurance. Without it, if a pipe burst you’d have to pay for the repairs and pay to replace any of the seller’s ruined furniture.
Speaking of burst pipes… Now that you’re a temporary landlord, you may have an obligation to the seller to complete maintenance requests during their rental period. In some areas, local laws govern both what you must fix and how quickly it must be fixed. And the longer the seller remains in the property, the higher the likelihood of a potential maintenance issue coming up.
Even though an agent is technically out of the transaction at close, Christman says that they’ll sometimes help facilitate these situations. Good agents have a wide network of handymen and repair people who can help out in a pinch. A written maintenance agreement should specify each party’s responsibilities — particularly if the seller breaks or damages something while they keep living in the house.
Gas, electricity, water, heat — who’s responsible for these costs while the seller remains in the home? Make sure that all of this is covered in the rental agreement prior to signing.
It’s not easy to handle the logistics of moving out of a current home or apartment, waiting to move into a new home, and handling all your stuff. Don’t forget to think about these logistics when negotiating with the seller, you might consider asking if you can store your belongings in the garage or basement after closing.
Risks of a rent-back agreement for sellers
A rent-back agreement has pros and cons on both sides of the deal. Sellers aren’t just getting to live in your home rent-free (or cheaply). Here are some of the risks for sellers.
Risk of losing the deposit if there are damages
Sellers want to walk away from their sale with 100% of its proceeds. But, by staying in a home you no longer own, you risk spilling red wine on the carpet, or damaging walls during the move out, and losing your deposit. If you’re renting back your previous home, you’ll have to treat it carefully.
Rent could be higher than their previous mortgage payment
If you’ve lived in your home for a long time, you likely have a lower mortgage payment than current market rents or the buyer’s new mortgage. The daily rate you pay to stay during the rent-back period will likely be more than your previous mortgage payment.
A major downside, particularly if you plan on staying for a few months, to these agreements is that you’re dealing with an inexperienced landlord. Regular buyers who aren’t investors might not know the first thing about landlord-tenant laws. They likely won’t have a network of professionals to fix a broken dishwasher or mow the lawn, and it could become a hassle to rent from them.
Sellers might need more time
What if you need more time? With a rent-back agreement, the clock starts ticking at close. You’ll have however many days or months you need to find and close on a new home and move out. In the unpredictable world of homebuying, this could create additional stress and pressure.
Risks of a rent-back agreement for buyers
Allowing someone else to live in your home isn’t without risks.
The seller might not vacate the property on time after the agreement ends
Do you know how to file an eviction if the seller doesn’t vacate the property on time? If the seller needs a few more days, do you have a place to stay? Think through what you’d do in a worst-case scenario before including a rent-back period in your offer letter.
You might be responsible for maintenance requests from the seller if something breaks during their rental period
If anything breaks during the rent-back period, you’ll likely have to arrange for a professional to fix it. You also might have to take care of mowing the lawn, yardwork, and snow removal. Ask your agent for some recommendations if you don’t have professionals in the area who could handle this.
The seller might leave damages that were not there during the final walkthrough.
While Christman says that, “Most people are good,” she warns that, “if they’re late and overwhelmed, they might leave the house full of stuff, or not fix something.”
If you haven’t set foot in the house since the final walkthrough at closing, you could be in for a surprise when it’s finally time to move in. One way to protect against this is to ask for another walkthrough prior to the seller vacating the property.
Should you offer a rent-back period?
Whether or not you should offer a seller a rent-back period will depend on both your situation and the seller’s circumstances. If you’ve temporarily moved in with family and can stay indefinitely, it’s less of an issue than if you’re living in an apartment and your lease is expiring. Some people also just don’t feel comfortable taking on the responsibilities of temporary landlordship.
If you’re hesitant about offering a rent-back period, Christman points out that you might have other options. You could offer the seller a longer close and apply for an extension on your mortgage rate lock. Maybe you could find a moving company that could pack for the sellers and help them move faster. She thinks that “if you have a good agent that will think outside the box and look at the whole situation and read all parties, it’s the best you can do to eliminate risk.”
Header Image Source: (Zac Gudakov / Unsplash)