What is a Rent Back?
In today’s housing market inventory is low and buyer demand is high. In such a market, many buyers need to get creative in structuring their offer on a home, and many sellers (future buyers) need to consider the fact that they, too, will soon encounter the same challenges that buyers vying for their home face. One common consideration in today’s seller-friendly market is a rent back. Simply put, a rent back is an offer that allows a seller to remain in their home after settlement on their property, as renters, for an agreed upon amount of time. This can be a huge bonus for sellers, as it allows them to obtain the cash for their home sale to complete the purchase of another property. Often, this gives sellers the flexibility needed to find their next home without the stress of needing to leave their home immediately upon settlement. For buyers, a rent back is a beneficial way to offer a seller some benefit, while reaping benefits of their own! Even while not moving in, a rent back allows a buyer to begin enjoying the perks of home ownership – in terms of tax perks, appreciation, and amortization – prior to actually moving in. A rent back, like most aspects of home buying, some with some perks, and some draw backs.
The perks of a rent back
A rent back can be a big deal to a seller. It allows them time to find a new home and orchestrate a move without having to worry about the stresses that come with a home sale – staging, keeping things around the house perfect for potential buyers, and avoid the time crunch that can come with simultaneously trying to sell and buy at the exact same time. For buyers, they can officially take ownership of a property, enjoying perks like home appreciation, tax write offs, and paying off their mortgage without having to wait for an extended settlement. In a time of rising rates, it also may help lock in better financing terms instead of paying extra for an extended rate lock or leaving fate in the hands of the markets. All other things being equal, a rent back option can offer the flexibility needed to make an offer stand out and get accepted over offers that don’t include this option. Another perk is that buyers can be compensated for the time a seller is renting from them. While in a competitive market it’s not uncommon to see “Free rent back” as part of an offer, buyers have the option of demanding rent for the time they’ll be out of their new home. Since their is a “gap month” when getting a mortgage (for example, if you settle on a home at the end of April, the first mortgage payment would be due not in May, but in June), this can help a buyer recoup some money spent on their purchase and get their finances in order.
A rent back, as with all things, doesn’t come without risk. During a rent back, risks are assumed similar to any landlord-tenant relationship. Since the sellers still live in the property, the potential for property damage, refusal to leave the property at the end of the rent back period, and other risks can still be present. If traditional mortgage financing is being used by a buyer, most loans will require a buyer to take occupancy of an owner-occupied home within 60 days of settlement as well, so while a rent back can offer some flexibility, there’s still a deadline on when the move into a new home needs to take place without breaching the financing contract.
Another thing to consider is that toward the end of a rent back, a new owner will need to do a walk through and ensure the property is left in as-agreed-upon shape by the seller/now tenant. The assistance and obligation of a real estate agent may or may not continue through the rent back period, so a new owner should be aware of their rights, expectations of the seller/tenant, and execution of all terms of a rent back.
Consider your market and your options
If you’re a buyer in today’s competitive landscape, we recommend having professional representation from a real estate agent to help you best structure an offer in your market, but a rent back is certainly something worth considering if you have the flexibility available to you. Price is certainly important, but taking into consideration a seller’s circumstances and structuring an offer that’s competitive in price, but also provides some additional conveniences and stress relief for a seller can help your offer stand out amongst others that don’t offer the same considerations. Every market is different, some consult with your agent to see if a rent back is something to consider in an offer, but make sure you’re aware of both the potential benefits and drawbacks of such an arrangement.