Home Equity

What Is a Rent-Back Agreement?

June 22, 2023

If you could use the money from selling your house, but don’t want to leave the place you’ve always called home, a rent-back agreement could be the right solution for you.

But what is a rent-back agreement?

This contract allows homeowners to get a lump sum for their real estate property while giving them the opportunity to stay in it afterward. Simply put, they’re property transfer contracts—they give owners the option to rent their home back following a home sale.

If you’re unfamiliar with rent-back agreements, this guide covers their general terms, pros and cons, and how to decide if they’re right for you.

How Do Rent-Back Agreements Work?

Rent back agreements are straightforward types of real estate transactions between the home seller and buyer. Terms of specific agreements may vary. But, generally, rent-backs have only a few steps:

A homeowner sells their house to a buyer at a predetermined sum.
The previous homeowner continues to live in the property, paying rent according to the terms of a newly established lease.

The lease agreement continues as long as both parties agree to keep renting the property.

That’s about all there is to a rent-back agreement. While they’re not overly complex contracts, there are a few practical and economic factors to keep in mind when considering how to sell your house and rent it back.

Benefits of Rent-Back Agreements

Rent back agreements are a quick way to convert your home equity when you’re in need of cash. They offer flexibility for homeowners looking to refinance or move in the future. And, perhaps most importantly, they allow people to stay in the homes they’ve always loved.

If you’re thinking about one for your property, consider the many potential benefits they offer, including:

Financial flexibility
Simplifying the process
No temporary housing
Retaining social access to neighborhood

Financial Flexibility for Homeowners

Leaseback agreements, like loans, can net homeowners a quick sum of cash. Loans, however, can have guidelines dictating how the money must be used and need to be paid back over the term of a contract.¹

Alternatively, with rent-back agreements, homeowners get to keep the money from their home’s sale and are free to do with it as they please. On top of these benefits, rent-back agreements can offer even more financial flexibility to homeowners by:²

Allowing them to buy their house back within a certain period of time
Freeing them from property taxes and repair costs
Compensating them as their property appreciates in value

Simplifying the Moving Process

Moving can be a hassle, so if that’s not part of your life plan, rent-back agreements allow you to stay in your home while still selling it. If you do want to move—or life requires it of you—they can also be a helpful tool to facilitate the process.

Getting a rent-back agreement on your current house before moving to another gives you:

A large amount of capital to invest in your next home
The freedom and time to search for the perfect place
A long grace period to move your possessions from one home to another

Whether you’re changing states, or simply streets, rent-back agreements increase your flexibility while house hunting and moving.

No Need to Find Temporary Housing

There’s no “in-between” period with rent-back agreements. Since you generally have the flexibility to set the lease length or renew, you won’t have to stay in any hotels or overpriced monthly rentals as you transition to your new place.

There will be no burdening family or friends either; just more time in the space you love—whether you plan to leave it or buy it back in the future.

Retaining Familiarity with Your Neighborhood

Perhaps the most compelling factor for homeowners considering rent-back agreements is the ability to stay in the place they’ve grown accustomed to. Familiar social environments provide joy and stability to people’s lives, and it can be difficult to give this up during a home sale.

Rent back agreements allow homeowners to leave on their terms, and even seek another place in the same neighborhood if they so desire.

Potential Drawbacks of Rent-Back Agreements

While rent-back agreements are flexible tools that allow homeowners to move at their own pace, they do have a few downsides. In rent-back agreements, homeowners become renters, thus changing the rights and responsibilities they may be accustomed to.

If you’re looking into a rent-back agreement, consider these possible drawbacks that they can present.

Reduced Control Over the Property

Tenant rights vary from place to place. For the most part, however, once you’re a renter, you’re not allowed to make any alterations to a property without the owner’s consent.³ That means if you want to:

Paint the living room
Plant a tree
Tear up the carpet
Remodel the kitchen
Do any other aesthetic or structural alterations to your previous property

You’ll need to get permission from the owner first. On the plus side, when things go wrong of their own accord—such as the toilet or water heater breaking down—someone else will fix it.

Furthermore, you can also lose other rights over the property that you previously had as the owner, such as:

The ability to sell it
The ability to rent out the property freely—while some owners may allow their tenants to sublet, they can place restrictions in the lease prohibiting your ability to do so⁴
The right to claim tax breaks associated with owning the property

The Impact on Mortgage Financing for Buyers

Generally, when you sell a home with a mortgage debt on it, the proceeds from the sale first go to settling the property’s debts before you get your profit.⁵

Rent back agreements are no different. So, if you have an outstanding amount due on your mortgage when you sell, expect to repay it prior to collecting your revenue. On a positive note, you’ll no longer be responsible for any monthly mortgage payment.

Key Elements to Consider in a Rent-Back Agreement

If you’re thinking about a leaseback agreement, it can be a useful financial tool to give you more control over your future. Before you ink the deal, however, be sure to carefully think over these rent-back agreement risks and key considerations:

Rent Payment Terms

Pay careful attention to the rent amount and due dates when signing a rent-back agreement. Most people possess a home for over 13 years before moving out of it, meaning that the majority of homeowners haven’t been renters in a long time.⁶

Before agreeing to any rental terms, ensure that:

The monthly rental payments fit into your new budget
You familiarize yourself with rent payment methods, such as direct deposits and writing checks
You understand the potential repercussions of missed payments

Duration of the Lease

Your future plans dictate how long you want to stay in your old place, and your potential lease length should reflect how long you actually plan on living there. Ensure to negotiate a lease length that coincides with your next move. If you’re uncertain of how long you’ll want to stay in your old home, signing a lease in short, renewable increments can help keep your options open.

For added flexibility, choose a rent-back agreement provider that allows extended contracts and the option to buy the property back during your lease. That way, if your relocation only turns out to be temporary, you can regain possession of your prior home.

Maintenance Responsibilities

In general, homeowners are responsible for the repairs to rented houses. However, there are some tasks that fall under the tenant’s responsibilities. Most of these are basic duties that you would have completed in routine maintenance anyways, including^:7

Removing trash
Cleaning excess dirt off the floor and walls
Reasonable maintenance of appliances and other surfaces to keep them free from rust
Preventing undue damage from fire, water, or other causes
Keeping emergency exits free form blockage and debris
Not tampering with fixtures and alarms

Before entering into a rental agreement, be sure to clarify the owner’s expectations for their tenants and your legal obligations.

Renters’ Insurance Requirements

Renters’ insurance can help shield tenants from legal liabilities, such as a lawsuit arising from an injury in their house. It can also protect their possessions in cases of theft or destruction. Some policies may even cover other costs, such as temporary housing expenses during a natural disaster.

While renters’ insurance isn’t generally required by law, owners can include contractual clauses that force their tenants to have a policy.⁸ When agreeing to a sale-leaseback agreement—or any other lease—ensure you understand your responsibilities regarding insurance.

Key Takeaways

Rent back agreements allow homeowners to sell their property and then rent it back, providing financial flexibility and the opportunity to stay in the home.
Benefits of rent-back agreements include financial flexibility, simplifying the moving process, no need for temporary housing, and retaining familiarity with the neighborhood.
Drawbacks may include higher rent payments, reduced control over the property, and the impact on mortgage financing for both sellers and buyers.
When considering a rent-back agreement, pay attention to rent payment terms, duration of the lease, maintenance responsibilities, and renters’ insurance requirements.
Rent back agreements can be a helpful financial tool, but it is crucial to carefully assess the risks and key considerations before signing one.

Sources:

Investopedia. What Is a Loan, How Does It Work, Types, and Tips on Getting One. https://www.investopedia.com/
EasyKnock. Sell & Stay. https://www.easyknock.com/
Law Insider. RIGHT OF TENANT TO MAKE ALTERATIONS AND IMPROVEMENTS Sample Clauses. https://www.lawinsider.com/
Tenant Resource Center. All About Subletting. https://www.tenantresourcecenter.org/
Forbes. This Is What Happens To Your Mortgage When You Sell Your House. https://www.forbes.com/
The New York Times. Where Do Homeowners Stay in Their Homes the Longest?. https://www.nytimes.com/
Zillow. Landlord Responsibilities and Duties of a Tenant . https://www.zillow.com/
Allstate. Is Renters Insurance Required?. https://www.allstate.com/
Psychology Today. The Power of Self-Managed, Familiar Places. https://www.psychologytoday.com/
World Population Review. Average Rent by State 2023. https://worldpopulationreview.com/