What is a rent back?

Sellers may want or need to stay in their home after they sell it; for example, they may need more time to find a replacement property or want their children to finish the school year. With a rent back agreement (which may also be called a sale and rent back, a sale-leaseback or a post-settlement occupancy agreement), the buyer allows the seller to live in the house for a short time after the close of escrow. Normally, a security deposit is paid and held either in escrow or by the new owner. Lenders usually approve a rent back of up to 59 days; a longer time could violate loan conditions requiring that the property be owner-occupied.

A rent back may help get your offer accepted in a multiple offer situations. It gives both sellers and buyers breathing room to make a major move. 

Key terms of a rent back agreement

Buyers should never let sellers remain in the home without a formal agreement. A rent- ack agreement will include these important terms:

• Amount of rent being charged, if any.
• Amount of security deposit, if any.
• Who will hold the deposit (the buyer or the escrow company)?
• Duration of the rent back or lease.
• Who will pay for utility and home maintenance responsibilities?
• Under what circumstances can the new owner can enter the property?

Negotiating terms

In a seller’s market, sellers may be able to negotiate their preferred terms, which could include a security deposits and a free rent back.  A bidder who is willing to consent to a rent back increases the chances of having their offer accepted in multiple offer situations. Indeed, the seller may be more likely to accept the bid even when there aren’t any other offers. 

Duration of a rent back agreement

Rent backs of up to 29 days or less are simple and are covered by an addendum to the purchase agreement, Seller License to Remain in Possession. However, a Residential Lease After Sale is necessary if the seller remains in the home for 30 days or more, and this agreement creates landlord-tenant obligations under California law.

Buyers may prefer to keep their rent back under 29 days to avoid these additional obligations but may still be able to accommodate the seller by agreeing on a later closing date. It’s best for both parties to consult legal experts and the mortgage broker who has arranged the funds to the buyers to understand the repercussions of a rent back agreement, especially if it includes a lease.

Lenders may have limits on the length of a rent back, often 60 days. Consult your mortgage broker for the requirements of your lender.

Value of a rent back

Buyers can charge the seller a fee to rent their former home, or they might offer this concession for free. This is an easy way to make a buyer’s offer more attractive. Rent back fees are often lower than the actual rental market value of the home. However, they can equal the carrying costs for the buyer, including mortgage and taxes for the period of the rent back.

Contact Madeline to find out if a rent back is appropriate for you.