Rent-Back Agreement

When selling your house, the title formally transfers to the buyer, which means that once the sale is completed (on the closing date), you will immediately have to vacate, hand over your keys, and turn over possession to the buyers. This kind of situation may create problems for sellers that haven’t been prepared to vacate after the closing. Imagine that, you finally find buyers that are able and willing to meet your price after many months of listing your home, but they want a quick closing, within six weeks for example. Meanwhile, the house that you intend to move into won’t be prepared for another three months. What are your options then?

One of the options can be to vacate your “old” property and find a rental somewhere. But, does this mean moving twice? First time to your rental, and a second time to your new house once you finally secure it? Well, yes. Also, this means you will have to pay extreme monthly rent, or possibly the costs of a hotel, while even paying to store all of your belongings and furniture. Needless to say, this option will probably involve very significant time and expense.

The second option would be to enter into a rent-back agreement with the buyers of your house. Essentially, this is what would make you a renter from the buyers, that have become the new owners. You, as well as your belongings, will stay in your old home for an estimated period of time, and you will be paying rent directly to the buyers during that period. This agreement gives the sellers extra time to live in the home after closing, essentially letting them become the new buyer’s temporary tenants. This usually doesn’t last for long, but this kind of arrangement gives sellers a chance to close on their new home and pack up for the big move. Once your new house is ready, you will vacate the old home. Also, the rent that the seller would pay could help the buyer recoup closing costs.

Buyers would enter in this kind of arrangement, in case they were renting, so it won’t be a problem to arrange an extension of two or three months with their landlord. They might be less excited by this agreement in case they are selling their old home so they have nowhere to go themselves. Then you can offer them to cover their relocation and storage costs during your rental period as that would be a great way to convince them to accept the deal.

How a rent-back agreement works

As we were told by Skydan Equity Partners, rent-back agreements are legally binding agreements made in writing between the buyer and the seller. Both parties need to decide on a couple of issues, for example, how long the seller would stay in the house after closing the deal and how much rent would he pay while there. The buyer may also charge a refundable deposit since there is always the chance that damages may occur while the seller is living in the house. That is why it is a good idea to have a holdback deposit which could range anywhere from 5000 to 10000 dollars. Once both the buyer and the seller agree to the terms, the buyer will close on the house. At this point, the buyer will officially take possession of the house and pay any upfront costs as he would do with a normal closing. In addition, the seller will need to pay any security deposits or upfront rent and remain in the house.

Get the Key Facts

You must receive a Key Facts Illustration that will show you all the essential information about the agreement, including:

• what happens if you fall behind with your rent
• when the rent can be increased
• the market value of your home following an independent valuation by a valuer with a duty of care to you
• the price the firm will pay for the property
• the rent payable under the agreement
• the fixed term of your tenancy agreement, which must be at least five years

When you get a written offer to buy your house, you’ll have fourteen days to consider it before the firm contacts you again. It would be best to discuss the idea of a rent-back with your potential buyers as early in your sales process as its possible. As you can probably imagine, it becomes much more difficult for buyers to agree to permit you to maintain control of their new house once they have already prepared to move.

What rent-back agreements mean for the seller

Although getting more time to buy your next home can be a lifesaver, you shouldn’t hesitate much since a rent-back agreement will not buy too much of a time. Lenders typically don’t accept anything longer than 60 days. Another downside is that, while you are still at the property, it is not yours anymore. You now have a landlord, which means that you must be extra careful not to cause any damage. Causing damage may result in you not getting your security deposit back.

What rent-back agreements mean for the buyer

If you are not in a rush to move on, it is a good thing to consider offering a rent-back option. It can really make your offer stronger, but being the new landlord means you can run into a couple of new problems. As a landlord, you are now responsible for making any repairs, if needed. And since you have tenants, most of the time you will need to make them in a very short period or even immediately. As the new owner, you will also have to worry about the sellers actually moving out on time. Sellers will rarely hesitate with moving out, but it can still happen. If this would happen, you will have to go through the usual process all landlords go to evict your tenants. And this situation is never pleasant. Still, most of the time everything will go fine, and your sellers will be grateful that they did not have to move twice.