What are the pros and cons of a rent-back agreement?
A rent-back arrangement may not be for everyone. Here’s a short list of pros and cons to help you determine if it’s right for you (and your buyer).
Pros
Barber says the primary advantage is budgeting. “The main benefit is that the seller closes on the property, so [they] have the proceeds from the sale to buy a new home.”
Another money-saving upside of a lease-back deal for a seller is that it can mean one less move. Instead of having to put furniture in storage and find a short-term rental until a new house is found or made ready, the seller stays put, saving time and money. With the average rent in the U.S. costing $1,748, the savings could be significant.
For a buyer, it means a little extra income, which can be particularly beneficial in a seller’s market when housing prices are high. Buyers can even ask for an additional cost-per-day or raise the rates on an extension if the seller doesn’t move out by the agreed-upon date.
Cons
A seller remaining in the home after closing on a rent-back agreement will have to make arrangements for renters’ insurance because liability is often the biggest point of contention. It’s wise to have a contingency plan if move-out is delayed because the buyer may not agree to an extension or may raise the rate significantly.
Buyers will have to wait an extended amount of time to move in or at least take possession and begin remodeling if they agree to a rent-back period. This could get complicated if they have sold a home or their lease is up. If the seller refuses to leave, the buyer will have to start the eviction process, which usually includes going to court and can get costly.
The buyer may not want to be a landlord who has to deal with cleaning up after the seller or collecting rent.
7 factors to consider in your rent-back agreement
When weighing the pros and cons of a rent-back situation, try to imagine every possible aspect of the agreement. Here are a few things to keep in mind:
1. Time frame: You’ll want to include a move-out date in your contract. If you’re just waiting on an impending closing date, it should be easy to determine how long you’ll be staying in the house. However, if you’re waiting on construction or renovation, or if you haven’t even found a new house yet, the timeline can get a bit vague. Thus, it’s wise to include a clause in the contract allowing for an extension should the need arise. Be aware that some buyers won’t agree to that, so you may still have to make a temporary move.
Keep in mind that if your buyer purchases your home with a mortgage loan, the lender may impose occupancy restrictions. If the lender requires the buyer to occupy the home, the buyer typically has up to 60 days to move in. Thus, the occupancy requirement could limit the number of days your buyer agrees to rent back the house.
Alternatively, if the rent-back period is more than 60 days, the lender may consider the home an investment property rather than a primary residence, and that can carry different requirements and limitations. You may be in a tenancy situation.
2. Rent amount: The lease-back contract should specify the rental amount.
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 an amount that similar homes in the area rent for, as a basis for rental fees.
“Get [the rent] for as little as you can,” suggests Anne Sena, whose decades of experience include serving New York before moving to Tennessee. But if your home is in a seller’s market, that might not be so easy.
Barber explains that despite changing market conditions, inventory is still tight, which means that “the rental market is stronger than the housing market,” so buyers can effectively “name their price” – and get it.
