Selling a home is a complex endeavor, and timing can be a major cause of stress. Often, sellers buy a new home at the same time that they sell 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 for sale.
What if the sellers manage to negotiate a sale of their old home before finding, or closing on, a new one? A rent-back agreement can be critical to ensuring that the sellers don't face a gap in housing.
Following the closing, "your" house is no longer yours. Title formally transfers to the buyer. This means that once you complete the sale (on the closing date, usually set within the contract), you will need to immediately vacate, 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 situation can create problems for sellers who might not be prepared to vacate after the closing. Imagine that after months of listing your home, you finally 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 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, who become 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.
Buyers may 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 may be less excited by this arrangement if they are selling their old home and have nowhere to go themselves. In this case, you might offer to cover their storage and relocation costs during your rental period as a way of convincing them to accept the deal.
A rent-back agreement is in many ways no different than any other rental agreement. You will definitely want to create a formal written agreement with the buyer, in the same way that you would have a formal written agreement with any renter.
There are numerous material terms that you'll want to include, in order to avoid ambiguity or conflict. Here are some key ones to consider or discuss with your attorney:
For more ideas on key terms to include in a rental agreement, check out Nolo's Lease and Rental Agreements.
To the extent possible, 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.