A “rentback” in real estate is when the sellers stay in the property for an agreed-upon period of time after the close of escrow. The reason sellers typically need rentbacks is because they need the proceeds from their sale in order to purchase their next home.
I am not a big fan of rentbacks, because most buyers want to gain possession of their new home after they close, for a variety of reasons. But if you’re considering requesting or granting a rentback, here are a few important things to know before you agree to one:
1. Execute and sign a “Seller in Possession” addendum. This is also called a rentback agreement, and it specifies all the details of the rentback. These include the length of time the seller can remain at the property after the closing date, whether the seller will pay the buyer a fee to stay in the property and who will pay utility costs during the rentback period.
2. Consult an attorney before you agree to let the seller remain in the property. A rentback technically is a form of tenancy, and things can get complicated if the rentback is more than 30 days. Most sellers don’t have intentions to keep hanging out indefinitely, but it’s a wise idea to avoid those scenarios. I recommend limiting the rentback to 29 days.
3. A rentback cost is typically the amount of a buyer’s PITI (principal, interest, taxes, insurance). Buyers should consult their lender on the amount of their payment and include that amount in the rentback agreement. Everyone should be clear on the amount. And if a buyer is waiving the fee as a negotiating strategy, the agreement should specify that there will be no cost to the sellers.
4. Think hard before you include a security deposit. Yes, there is the chance that the sellers’ movers can damage a door jamb or scratch the floor while they’re moving out. Some buyers want to include a security deposit, or “holdback,” in escrow. This is when the escrow officer retains a certain amount of money—say, $2,000—to cover any potential damages. However, including this sort of fee can come across as a little insulting, because it basically communicates that the buyers don’t trust the sellers to act in good faith if something is damaged. Use your best judgement on this one if you’re a buyer.
5. Consult your insurance agent on the best strategy for covering the rentback. Most insurance reps will recommend that the sellers put a renter’s policy (HO4) in place that carries $300,000 in liability and lists the buyers as landlords as additionally insured. Make sure to include that term in the rentback agreement if everyone is on board.
6. Be cool about the keys. Though a buyer technically owns the property and should have keys at closing, consider extending the key handoff to the date the rentback ends.