U.S. Markets closed

A Rent-Back Agreement Can Protect Your New Home

After months of house hunting, you’ve finally found your dream home and the seller has accepted your bid. But there’s one problem—the seller isn’t ready to move out.

In such a case, a seller might want to go ahead and close on the home in order to have enough money to buy a new home. But in the interim, the seller needs a place to live.

Linda Sanderfoot, a real estate agent at Coldwell Banker in Neenah, Wisconsin says that if you decide to let the seller stay, a rent-back agreement can protect you. With such an agreement, if the seller damages your new home, or someone is hurt on the property the seller will be responsible, not you.

When considering a rent-back agreement, here's how to make sure you're covered.

Understand the reason for the agreement. It’s your real estate agent’s job to communicate with the listing agent to find out why the seller wants a rent-back agreement. It could be that the seller needs extra time to move—or may need the proceeds from the sale to purchase a new home. Understanding the situation will help you to determine the terms of the agreement.

Charge a fair price. Don’t try to gouge the seller on rent. Jennifer Baxter, an associate broker at Coldwell Banker RMR in Suwanee, Georgia says you should charge the equivalent of what you’ll be paying for your mortgage, which includes your principal, interest, taxes, and insurance. If the seller isn’t going to stay in the home for a month or two full months, you can use a prorated rent calculator to determine how much to charge. Your best move: Collect the money upfront, says Baxter.

Additionally, the lease agreement should spell out who is responsible for paying for utilities. Typically, the services remain in the seller’s name until you take possession of the property, according to Baxter.

Don’t sign a lease that lasts more than 60 days. Like a standard lease, rent-back agreement needs to stipulate when the tenant will vacate the property. If you agree that the seller will remain in the home for more than 60 days after closing, however, the home will be considered an investment property by your mortgage lender, says Richard Redmond, broker at All California Mortgage in Larkspur, Calif. Because loans for investment properties have interest rates that can be up to 1.25 percent higher than a mortgage rate, setting a 60-day cap for the seller’s stay is crucial.

Charge a penalty if the seller stays longer than agreed. The rent-back agreement should include a holdover fee just in case the seller doesn’t vacate the house on the move-out date. Sanderfoot recommends charging the tenant an extra $100 per day spent in the home, but the amount can vary depending on where you live. This fee could help you to avoid evicting the seller, which is a time-consuming, often-complicated process.

Collect a security deposit. A security deposit offers you protection if the seller damages the property during the rental period.

Require renters insurance. In addition to having your own homeowners insurance policy, it's a good idea to require the seller to purchase renter’s insurance, says Sanderfoot. The reason is that your homeowner’s insurance won’t cover the tenant’s belongings if there’s damage, say, from a fire. And if someone is hurt on the property, the renter will be responsible, not you.

Get a copy of the renter’s insurance policy prior to closing, and notify your insurance provider of the rent-back agreement—the company may need to adjust your policy, says Jeanne Salvatore of the Insurance Information Institute.

More on Selling and Buying a Home

• The Real State of Real Estate 
• 8 Ways to Boost Your Home Value
• 10 Tips for Home Buying and Selling
• Best Time for Selling a Home
• Don't Confuse Mortgage Preapproval With Prequalification
• Home-Sale Mistakes That Cost You Money
• Red Flags That Can Ruin a Home Sale
• Is It Harder or Easier to Get a Mortgage?

More from Consumer Reports:
Top pick tires for 2016
Best used cars for $25,000 and less
7 best mattresses for couples

Consumer Reports has no relationship with any advertisers on this website. Copyright © 2006-2016 Consumers Union of U.S.