While rent-back agreements are beneficial for some individuals, there are some risks associated with them. Here are some of the biggest rent-back agreement risks.
When you buy a house, you hope for the process to include a fast closing and seamless move-in. Likewise, as a seller, you probably aim for a quick transition into a new residence.
But in real estate, things don’t always go as smoothly. Sometimes, sellers need to continue living in the home for a period of time following the sale. In those situations, buyers and sellers may enter into rent-back agreements.
If you’re a buyer or a seller entering a rent-back agreement, there are several things you should know about the process, from how it works in general to more specific details. Keep reading for a full breakdown.
A rent-back agreement is a legally binding arrangement between a home seller and a home buyer that allows the seller to continue residing at the property as a renter for a specified amount of time following a sale.1
These agreements operate very much like a standard rental agreement, just like someone who rents an apartment would sign. Rent-back agreements are signed by both parties and describe the various stipulations that each party has agreed to. Among other examples, some of the stipulations covered in a rent-back agreement include:
In other words, when a seller signs a rent-back agreement, they essentially become a tenant and begin renting the house from the new owners, who operate as landlords. Generally, normal rental agreement conditions apply—the sellers pay rent to the new owners, may be subject to security deposits and fees, and must abide by the rules of the agreement.
Likewise, home buyers are obligated to fulfill the duties of a landlord as outlined in the agreement. In addition to collecting rent, they may be responsible for things like maintaining the property and replacing appliances that break.
There are a handful of situations where buyers and sellers might enter into a rent-back agreement. And in the right conditions, rent-back agreements can be a beneficial arrangement for both the buyers and the sellers.
In most cases, rent-back agreements are requested by sellers who are unable to or uninterested in moving out right away.2 Unexpected offers, family obligations, and the inability to find a new home before selling are all reasons someone might request a rent-back agreement. In these situations, the option to stay in the house for a few months can reduce the pressure to find a new home quickly and alleviate the stress of last-minute moves.
For buyers, rent-back agreements could be the opportunity to earn extra money after a sale, which can be a cash-strapped time for new homeowners. If they have no pressing needs to move in right away, it could make their offer more appealing to sellers who aren’t ready to leave yet.
That said, rent-back agreements may not always be the best option for buyers or sellers. There are several rent-back agreement risks that both parties should be aware of in order to prevent their occurrence.
For sellers who can’t move out right away, rent-back agreements are the opportunity to put off their move and stay in their house a little longer. But sellers should be aware of the following rent-back agreement risks:
As a buyer, understanding the potential rent-back agreement risks can help ensure that you’re able to reap the full benefits the situation can pose.
For buyers, the biggest drawbacks to rent-back agreements are:
Although rent-back agreements can carry certain risks for buyers and sellers, there are ways to minimize those risks and help ensure that the agreement remains mutually beneficial. Before you sign, here are a few ways to make sure all of your bases are covered.3
Rent-back agreements are legally binding for both parties, so having your lawyer look over the paperwork is a good idea for buyers and sellers. A lawyer can be useful in ensuring that both parties are protected during the rent-back period. They can also answer other questions, such as “Can a seller back out of a rent-to-own agreement?”
Additionally, working with a lawyer to draw up your rent-back agreement can help both parties come to a fair compromise over various arrangement particulars, including determining who is responsible for:
If you’re a buyer who is thinking about entering a rent-back agreement with a seller, it’s important to inform your mortgage lender, if you have one. This is because some lenders may have restrictions regarding when new homeowners must officially possess the property.1
For example, some mortgage lenders may limit rent-back agreement periods to 60 days or fewer, so be sure to check with your bank before you agree to any rent-back provisions.
For periods of 30 days or fewer, you may be able to forgo a standard rent-back agreement in favor of what’s known as a Seller in Possession Form. This somewhat simpler document covers all of the important bases of the rent-back agreement, including:
Whether you’re buying or selling, it’s important that both parties review and sign the rent-back agreement. This protects both parties and ensures that the agreement is fair and legally sound.
Additionally, the formal agreement contains all the information regarding the agreement, including:
With a formal rent-back agreement in place, both parties are more likely to have a positive experience.
If you’re selling your house but aren’t quite ready to leave it behind, consider partnering with Truehold. Truehold’s sale-leaseback makes it easy to access your equity and continue living at home as a renter.
How does it work? It’s simple. We offer a competitive price for your home and give you the option of renting your home as long as you like, provided you pay rent and comply with the lease. We contract a licensed, third-party inspection to determine the value of the home, then we work with you to identify a positive solution. We also cover major home repairs, home insurance, and property tax.
Interested in Truehold’s unique sale-leaseback program? Connect with a Truehold advisor today to learn more about how to set up your residential leaseback agreement.
1. Consumer Reports. What to Know About Rent-Back Agreements If You're Buying a Home. https://www.consumerreports.org/buying-a-home/rent-back-agreements-buying-a-home/
2. The Washington Post. A rent-back agreement allows a home seller to buy himself extra time. https://www.washingtonpost.com/realestate/buying-yourself-some-extra-time/2017/10/12/a702e918-a2c8-11e7-b14f-f41773cd5a14_story.html
3. Federal Title. Rent-Backs: Perks & PItfalls. https://www.federaltitle.com/rent-back-agreements/
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