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After the Sale: Your Guide to Rent-Back Agreements

After the Sale: Your Guide to Rent-Back Agreements

Rent-back agreements allow a seller to remain in a home following the close of the sale. Sometimes home sellers may ask to rent back property for a few weeks after closing. There are several conditions that may lead the seller to rent back the home. It may be that the seller has not found a suitable new home by the time the transaction closes. Sellers may also need more time before moving into the new property.

Protecting Homeowners’ Rights

It is important for homebuyers to conduct due diligence when accepting rent-back agreements. At the minimum, the buyer should insist on striking a formal occupancy agreement in the presence of a real estate lawyer. This is a contract that states the terms and conditions of the stay agreement and protects the buyer from property damage.

Some states provide Seller in Possession (SIP) forms for homebuyers to use in these circumstances. The forms outline the contract terms of a seller rent-back agreement and can be used to modify the purchase contract. SIP applies to short-term rent back contracts of less than 30 days.

Insurance Coverage for Rent-Back Agreements

The buyer should insist the seller’s insurer maintain coverage during the rent-back period. Some insurers agree to this arrangement and extend coverage upon request. However, this is a risky arrangement because the seller does not own the home, so the insurer can refuse to cover future claims.

At the same time, the buyer has homeowners’ insurance for the home since most lenders require the buyer to have an insurance policy before closing. Some experts have argued that if a claim was to arise, the seller’s insurer would seek reimbursement from the buyer’s insurance company.

Determining Rental Charges

The seller may request to stay in the property for a few days rent-free as a part of the sale agreement. However, it is still important to strike a formal agreement that addresses liability issues. If there is no such agreement, the buyer can determine the rent charges by using the daily proration rate for the property. Alternatively, the buyer can check the local rental rates and use them if they are higher than the PITI rates for the home. For further protection, the buyer can have the seller sign a short-term residential lease agreement with the assistance of a real estate lawyer.

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