In a perfect world, you sell your home and hire a moving truck to transport your worldly effects to your new abode (preferably over a three-day weekend) a few days before closing. When you’ve completely moved out, you hand the keys to the new owners and head to your new digs to unpack your things.
In our not-so-perfect world, timing your home sale closing with your new pad’s move-in date proves trickier.
One solution? A seller rent-back agreement. Also referred to as a sale-leaseback or holdover, a rent-back arrangement allows you to stay in your home for a designated period of time after you’ve already sold it.
Maybe the home you’re building doesn’t pass inspection, and the construction crew needs an extra week. Or you need the funds from the sale of your current home as the down payment on the new house. Whatever the scenario, a seller rent-back helps you avoid the dreaded double-move, saving you from schlepping your belongings to a temporary residence until your new place is ready.
While renting your home back after your sell isn’t the norm, it isn’t out of the ordinary. A 2017 National Association of Realtors® survey found approximately 20% of sellers moved out of their home during a leaseback period after they sold their home. In contrast, roughly 50% of sellers moved out between the time they accepted an offer and the sale closed. With today’s inventory shortage, the percentage of sellers negotiating rent-backs is likely even higher.
We spoke with Anne Sena, who has a combined 24 years of real estate experience in New York and Tennessee, for insight on how a seller rent-back works and what sellers should keep in mind when they negotiate the details.
You may need to convince the buyer to rent it back
A rent-back agreement may benefit you as the seller, but will your buyer agree to one? According to Sena, buyers tend to shy away from rent-back agreements. Occasionally, a rent-back could benefit a buyer who doesn’t need to move right away (e.g., buyers who rent their current home and have time left on their lease). However, most buyers would rather move into their new home, not become a landlord. It may not be a responsibility the buyer wants to take on, even for a short period of time.
Buyers are more amenable to a seller-rent back in a tight seller’s market with high buyer demand and fewer homes on the market. In this type of market, buyers often need to be flexible with the sale terms or risk losing out to another buyer. Sena shares that this is currently true for the low-inventory market in Tennessee. “We’re seeing more of the rent-back situation than we ever did in any other time in history, just because we’re selling the house so fast, but then … [sellers] have nowhere to go,” she notes.
Put your rent-back agreement in writing
A sale-leaseback agreement signed by all parties protects everyone involved by preventing confusion down the road. Depending on how long you stay in your home after its sale, you’ll need either an addendum to the purchase agreement, such as a Seller In-Possession addendum or a rental agreement.
Many Realtor® associations offer state-specific rent-back agreements to member agents. For example, California requires a residential lease agreement for rent-backs that exceed 29 days. For 30 days or fewer, an addendum to the purchase agreement is sufficient.
Seller rent-back negotiations usually happen concurrently with the purchase agreement negotiation, so you’ll want to take advantage of your real estate agent’s deal-making expertise to garner the best terms for your situation. In some cases, you could walk away with more than a few extra days to move. According to Sena, she once negotiated a six-month seller rent-back for one of her clients — at no rental cost to the seller.
Factors to consider in your rent-back agreement
Similar to a buyer’s purchase agreement, the buyer and seller negotiate and agree to the terms of the post-sale occupancy agreement. Since every rent-back agreement is customizable to the individual home sale, the terms of every rent-back agreement differ. If you have questions about what’s typical in your area, such as who pays for what, ask your real estate agent for advice.
For almost all rent-back agreements, these are the factors you should consider and include in the document:
How long will you remain in your home after the sale? If you’ve identified a new home and set a closing date, you have an idea of how much time you’ll need. But in certain cases, such as an out-of-state move where you haven’t found the right home yet, your move-out date isn’t as cut-and-dry. Consider adding a clause to your agreement with an option to extend the rent-back term up to a certain number of days in the event you need extra time.
Keep in mind that if your buyer purchases your home with a mortgage loan, the lender has its own occupancy restrictions. If the lender requires the buyer to occupy the home, the buyer typically has up to 60 days to move in. The occupancy requirement could limit the number of days your buyer agrees to rent back the house.
How much rent will you pay? Some buyers calculate the per diem cost of their mortgage and property tax, then multiply that dollar amount by the number of days you occupy the home to come up with a figure. Others will want to use market value, or the amount that similar homes in the area rent for, as a basis for rental fees. And in a competitive seller’s market, a buyer may offer free rent-back as a way to sweeten their purchase offer.
The rent-back agreement should also include these payment details:
- Payment due dates and whether you prepay rent or pay in arrears
- A designated payee, such as the new owner or an escrow account holder
- Penalty fees for late-payments
When will you transfer the water, power, and electricity accounts to the new owner, and who pays for the usage during your rent-back period? Come to an agreement with the buyer and put the details in writing.
Talk to your insurance agent about what type of insurance you’ll need after the sale of your home since the new owner’s home insurance won’t cover your belongings as a tenant. You will probably need renter’s insurance to cover your possessions in the event of loss or damage.
As with most rental agreements, a security deposit affords the new owner peace of mind in the event the seller damages the home during the rent-back period. Sena says that the parties typically hold the funds in an escrow account. The new owner conducts a final walkthrough at the end of the seller occupancy before releasing the security deposit back to the seller.
Maintenance and repairs
Clarify who will maintain the home during the rent-back period. For example, spell out who is responsible for maintaining front yard landscaping.
Repairs are tricker. What happens if the water heater stops working after the sale closes and you’re occupying the property? In many residential lease situations, the owner is ultimately responsible for such repairs. But in a rent-back situation, your agreement may stipulate that you agree to return the home in the same condition as you took possession, which could place the responsibility on you. Study your rent-back agreement closely and understand your potential liability for unexpected home repairs before signing.
At some point, the new owner might want to measure the living room or come by with contractors to bid on a remodel. Spell out how much advance notice the new owner must give before entering the property while you still reside there.
Renting back your home could be the solution — if done right
Negotiating extra time to move out of your home relieves some of the stress that accompanies buying a home while selling the one you’re in, but that doesn’t mean it’s without risks. To avoid confusion and conflict, lay out the terms in advance and anticipate issues before transitioning from owner to tenant.
And if you’re in a competitive seller’s market, Sena reminds sellers not to be shy when asking for what they want. “Get [the rent] for as little as you can,” she says. And “write your contract exactly the way you need it to be.”
Header Image Source: (Alex Tan / Death to Stock)