How to Arrange a Short-Term Rent-Back With Your Home Buyers

Sellers often buy a new home at the same time as or soon after selling their old one. This is particularly common when the seller is leaving the geographic area and searching for a new residence in another city or state, or when few homes are on the market. That can create problems when the sellers manage to negotiate a sale of their old home before finding, or closing on, a new one. Spending weeks in a hotel with all one's possessions is not an attractive option. A rent-back agreement can be critical to ensuring that the sellers don't face a gap in housing.

Purpose of a Real Estate Rent-Back Agreement

Following the closing of escrow, "your" house is no longer yours. Title formally transfers to the buyer. You will need to immediately vacate the property, hand over the keys, and turn over possession to the buyers.

(For more information on the legal distinctions between signing a purchase contract, going into escrow, and closing, check out Guide to Escrow and Closing.)

This can happen faster than you might have been prepared for. Imagine that you find buyers who are willing and able to meet your price, but they want a quick closing, within six weeks. Meanwhile, the home that you and your family intend to move into will not be ready for another two months. What are your options?

One option is to vacate your "old" house and find a rental somewhere. But this means moving twice—once to your rental, and a second time to your real, "new" home once you finally secure it. This could also mean paying exorbitant monthly rent, or perhaps the costs of a nightly hotel, while also paying to store all of your furniture and belongings. Needless to say, this option will likely involve significant time and expense.

A second, often more feasible option is to enter into a "rent-back" agreement with the buyers of your old home. Essentially, this would make you into a renter from the buyers, the new owners. You, and your belongings, would stay in your old home for a set period of time, and you would pay rent directly to the buyers. Once your new home was ready, you would vacate the old home.

Homebuyers might be willing to enter in this sort of arrangement, particularly if they were renting and can simply arrange an extension of a month or two with their landlord. They might be less excited by this arrangement if they are selling their old home and have nowhere to go themselves. You might offer to cover their storage and relocation costs during your rental period as a way of convincing them to accept the deal.

Terms to Include in a Rent-Back Agreement

A rent-back agreement is in many ways no different than any other rental agreement. You will definitely want to create a formal written document, in the same way that you would with any rental arrangement. There are numerous material terms to include, in order to avoid ambiguity or conflict. Here are some key ones to consider or discuss with your attorney:

• Rent. How much will you pay the buyer in order to live in your home? A market-rate rental amount is common. Neither of you should try to gouge the other, particularly given that you are both acting collaboratively to make the complex dance of a home sale go smoothly. The structure of the rent might depend on whether you expect to stay an extra few days or several weeks. If it is a matter of days, you might consider a daily rate (such as the market rate monthly rate divided by 30). If it's a matter of weeks, you might suggest paying all of the money up-front to sweeten the deal for the buyer.
• Length of term. Don't expect the buyer to offer a long rent-back or leave open-ended the time by which you must leave. For one thing, it can create trouble with the buyer's mortgage lender, which will want to charge a higher interest rate for what appears to be an "investment" property.
• Utilities. The rental agreement should specify who will pay the utilities. Given that your name is likely still attached to the electric and gas bills, it might be easiest for you to pay those costs directly, rather than reimburse the buyer.
• Insurance. Who is maintaining homeowner's insurance during the period of the rental? Given that you no longer own the home, the buyer likely needs to take over the policy. And you might need to obtain renter's insurance, which covers your personal possessions in the event of a disaster (fire, flood, and so forth).
• Security deposit. In most rental agreements, the renter pays a security deposit to the owner. Even in a rent-back situation, this is common. Offering a security deposit will give the buyers confidence that they will have some protection if you cause damage to the home during your rent-back period.
• Entrance and storage. Are the buyers permitted to enter their house during the term of your rent-back? Are they permitted to store any of their furniture and personal property, which they will be moving into the home shortly? These issues should be discussed and negotiated so that there are no surprises.

For more ideas on key terms to include in a rental agreement, check out Lease and Rental Agreements.

Discuss the idea of a rent-back with potential buyers as early in the sales process as possible. As you can imagine, it becomes increasingly difficult for buyers to agree to allow you maintain control of "their" house once they have already prepared to move.