How Rent-Back Agreements Work for Sellers and Buyers

For financial reasons, many sellers must first sell their current home before closing on their next one. Naturally this can create some timing problems because buyers usually want possession of the home once they’ve closed on it. If the seller hasn’t yet made a deal on another home, or that home’s closing is a month or more away, he may be faced with moving twice—once to a temporary place and once to the new home. To cover the stretch of time between closings, a rent-back agreement can give the seller more time as long as the buyer isn’t in a hurry to move in and both parties can agree upon the terms. But keep the process moving because most rent-back agreements only last a maximum of 30 to 60 days.

A rent-back agreement is a legally binding agreement made in writing between the seller and buyer with terms that are much the same as a leasing agreement between a landlord and tenant. There are issues that can get a little tricky, especially since the seller is now a tenant in what used to be his own home. And the buyer is a landlord for the home he is about to possess, possibly without knowledge of landlord responsibilities. Make sure you cover the basics in the following areas.

Terms and Possession

Before closing, all the terms of your rent-back agreement need to be worked out, which includes how rent will be paid, what it will cost, when the seller (now tenant) will move out, and other critical factors covered below. As a buyer, you can’t assume that the seller will agree to anything or behave as you wish just because you bought his home. Take the rent-back agreement just as seriously as the purchase contract. Also, look up eviction laws where you live just in case the seller decides he’s going to stay put as long as he can.

Rent, Security Deposit, and Late Charges

Just as in any rental agreement, the buyer, now landlord, may collect a refundable security deposit in case the property is damaged or left in disarray at the end of the rental term. Both parties need to agree upon fair rent for the duration of the seller’s occupancy. This can reflect current local rent rates for similar properties. At the closing, the buyer pays the usual upfront closing costs and the seller pays the security deposit and upfront rent for whatever specified time. At the end of closing, the buyer gets the keys and the seller remains in the home, now as a tenant. Just as any landlord would charge a fee for late rent, so too can the new owner if the seller isn’t on time with payment. Such terms must be covered in the rent-back agreement.

Responsibility for Utilities

The terms of the agreement also need to specify who pays for utilities. Usually sellers have the utilities switched out of their name on the closing date. But in a rent-back agreement, it may be in the buyer’s interest to have the seller keep utilities in their name and continue to pay for them during their extended stay in the home.

Entry Rights

Cover the right to enter the home in the rent-back agreement. If the buyer (now owner) wants to start painting or making other changes to the home while the seller still lives there, they’ll need to give proper notice before entering the home—24 hours by law in Ohio. The same is true if entry is needed to make repairs.

Responsibility for Maintenance

The terms of the agreement also need to cover who maintains the interior and exterior of the home. Perhaps the seller will still be responsible for mowing the yard. But if the stove stops working, it’s likely the tenant will be calling his new landlord to fix it or get a new one. Specify maintenance terms to ease the handling of any unforeseen circumstances.

Insurance

The new owner will need to have insurance on the home as part of a lender’s requirement—and because it make sense as a property owner. But the owner’s insurance probably won’t cover the contents of the tenant’s possessions, so there should be terms for the tenant to have renter’s insurance. Requiring proof of renter’s insurance is optimal.

Inspections

The new owner should do a walk-through of the property prior to closing to take note of the condition. Take photos to document. Then do another walk-through upon possession of the property and at the end of the seller’s rental term to determine any damages that require compensation, which would be taken out of the security deposit.

Your Realtor® can guide you in the proper standard form to use for a rent-back agreement. For legal questions or an agreement with special circumstances beyond the standard, consult an attorney. If you’re a buyer who doesn’t have time constraints to move quickly, your willingness to rent back the home to the seller could help you strike the deal you want. But cover your bases and make sure the terms of such an agreement are spelled out as specifically as possible. And if you’re a seller trying to avoid two moves, consider the rent-back agreement so that you can stay settled while wrapping up the loose ends to get into your new home.