Just when you thought the stress of getting your home sold is over, there’s the next challenging hurdle of moving into your new place… if you even have one yet! A rent-back can be a helpful tool for a seller who needs more time to pack up a lifetime of belongings or still needs to find a new place to live. Some sellers need the proceeds from the sale before they can pay for and close on their upleg so there is a period of time between closes that they are essentially homeless.
As a buyer, including a rent-back in your initial offer may give you a leg-up on the competition. If the seller is going to need more time after the close of escrow, a rent-back can make your offer more attractive. Other buyers may not have the ability or willingness to offer a rent-back.
How a Rent-Back Works
A rent-back agreement is a legally binding part of a purchase contract that does what it says: the buyer rents back the home to the seller for a specific period of time. The seller/tenant and buyer/landlord agree on how long the seller will stay in the property and how much the buyer will charge. Typically, the seller agrees to pay the buyers’ PITI which is their total monthly payment for their loan plus taxes and insurance. In this way, the buyer is not losing any money while the seller is still living in the property. But like everything in the contract, it’s negotiable. For instance, I just sold a home in which my client, the seller, got a 30 day rent-back for free. We had so many offers that several buyers were willing to offer the rent-back at no charge in order to sweeten the deal.
It’s best to negotiate all terms up front at the same time you’re negotiating the offer. Terms including deposit, utilities, renter’s insurance will be more easily agreed upon early on. But once the offer is fully executed, if the buyer did not stipulate a deposit, there’s very little chance the seller will agree to it later on.
Also, keep in mind the following: Lenders typically allow rent-backs for no more than 60 days. A rent-back for 29 days or less requires a simpler agreement than a rent back for 30 days or more. The buyer gets the keys at the close of escrow, but possession of the property is not delivered until the end of the rent-back. The buyer/landlord must give the seller/tenant 24 hour notice, per the agreement, for access to the property.
The Potential Negatives of a Rent-Back for Buyers and Sellers:
For a seller who has lived in a home for a long time with a small mortgage, paying the buyer’s PITI can cause sticker shock, because it’s based on a higher value and subsequently a larger loan amount. Another possible downside for the seller is that you’re now living in someone else’s house! This can have emotional implications that are hard to imagine beforehand.
From the buyer’s perspective, you own a home, but someone else is living in it now! You have the responsibilities of a landlord. And there is the risk that the seller may not move out on the scheduled date.
When executed properly, a rent-back agreement can be a win-win for everyone involved. If you have more questions about rent-backs or are looking for a solution for your particular situation, feel free to call me at (310) 428-8804.