Buyer's Corner: The rent-back offer
Question: What exactly is a "Rent-Back" offer, and when should they be used?
In most real estate transactions, the buyer takes possession of the property at or shortly after closing. A rent-back is an offer made by the prospective buyer to allow the seller to remain in possession of the home for a longer period of time.
Why rent-backs benefit the seller
Many sellers find themselves making the dreaded double-move: first from the sold property into interim rental housing, then from the rental into a newly purchased home. Moving twice in a short time span can be costly, and not just in a financial sense. Most sellers in this position would welcome the chance to avoid any additional hassle, especially after having gone through the sometimes-draining process of putting their home on the market.
How a rent-back offer can benefit the prospective buyer
Because they are somewhat unconventional, making a rent-back offer to the seller can give the buyer some much-needed negotiating leverage. If moving into the home right away is not critical for the buyer, a rent-back offer may convince the seller to make concessions in return (by lowering the price or altering contingencies in the contract, for instance).
Rent-backs versus delayed closing
An alternative to offering a rent-back for sellers who are not ready to move into their new home is to delay the closing until the seller can move. However, it may be to the benefit of both parties to close sooner rather than later. Beside the peace of mind that a closed transaction gives both buyer and seller, closing gives the seller financial flexibility that may be crucial to them.
Buyers in competitive markets can use rent-back offers as a way to set themselves apart from the crowds of other serious buyers, and without getting into a bidding war.
Details and considerations
The amount of rent the seller pays the new owner in these arrangements is negotiable. In most cases (and if the buyer is not competing with other offers), the offer asks for the seller to cover ownership costs (mortgage payment, property taxes and homeowner's insurance). It's important to remember that the monthly ownership costs for the new buyer will likely be higher than they were for the previous owner, especially if they had owned the home for some time.
If it works to the buyer's overall advantage, it's not unusual for the seller to pay the new owner less than the monthly ownership costs. In rare cases (usually in highly competitive markets), buyers may offer a no-cost rent-back to the seller for short periods.
Regardless of the financial arrangement, the length of occupancy should be explicitly denoted in the closing contract. Some areas have specific occupancy arrangement contracts that should be filled out for this purpose as well.