What does a sale and rent back deliver, and what does it cost?
Owners come to me with a purchase offer and ask whether the figure is fair. My first question is always the same: what does the tenancy agreement say? That is usually where the conversation goes quiet. In the paperwork owners have shown me so far, the tenancy agreement was not available at the first meeting. And the enquiries reach me almost only from the Dresden detached-house districts, from Weißig, Trachau or Leuben, hardly ever from the flat districts in Striesen or the Neustadt. Both are impressions from my own conversations, not a survey.
How it runs, from the first offer to the notary appointment
Six steps. At three of them I have watched owners lose time or bargaining position. I have marked those.
Enquiry and first offer
You describe the property, you receive a figure. So far it costs nothing. The mistake comes next: anyone judging an offer without knowing their own market value is negotiating against a number they cannot place.
Vacant market value, established independently
You need two figures. First, what the property would fetch vacant on the market. Second, what it is worth let. The difference is the price of staying put. Without that difference every negotiation is guesswork.
Have the purchase contract and the tenancy drafted together
This is where most time is lost. The purchase contract is ready, the tenancy agreement only arrives shortly before the appointment. By then the rent level is effectively off the table, because every other thread has already been pulled. Ask for both drafts at the same time.
Time is lost hereAssemble the paperwork
Land register extract, cadastral map, floor area calculation, energy certificate, and for flats the declaration of division and the meeting minutes. This is the second time sink. Official records take their processing time. Start on it before you negotiate, not afterwards.
Time is lost hereThe notary appointment
For consumer contracts on land, the notary should as a rule make the draft available two weeks before the notarisation (§ 17 para. 2a BeurkG). Those two weeks are your review time, and they apply to the purchase contract. There is no such deadline for the tenancy agreement. That is precisely why it has to be finished beforehand.
After notarisation
Purchase price due date, handover, start of the tenancy. The third time sink: if the tenancy start and the transfer of ownership do not fall on the same date, you either pay rent for a house you still own, or you live there for a while without a contract and sort it out later.
Time is lost hereThe rent afterwards: where the first figure comes from
The starting rent is not derived from the rent index. It comes out of the buyer's calculation, because they are buying as an investor and want to see a return. That produces a connection that rarely comes up on its own in these conversations: a higher rent lets the buyer offer a higher purchase price. It sounds good and it is a trap. You pay that higher purchase price back yourself over the years.
So both figures belong in the same negotiation. An offer with a high price and a high rent can be worse than one with a lower price and a lower rent. You can only see that if you calculate the two together.
Stepped rent under § 557a BGB
A fixed amount is written into the contract for each period. The law requires exactly that: the respective rent or the increase stated as a sum of money, not as a percentage. Each step must hold for at least one year. While the stepped rent runs, increases to the local reference rent and modernisation surcharges are excluded (§ 557a para. 2 BGB). In return, your own right to give notice may be excluded for no more than four years (§ 557a para. 3 BGB).
Index-linked rent under § 557b BGB
The rent follows the cost-of-living price index for all private households in Germany. It is compiled by the Federal Statistical Office. Here too the same applies: unchanged for at least one year at a time, and no increases to the local reference rent (§ 557b para. 2 BGB). The landlord has to demand the adjustment in text form and state the index level with it; payment begins with the month after next (§ 557b para. 3 BGB).
The difference is not a legal one but an economic one. With a stepped rent you know on the day you sign what you will pay in year ten. With an index-linked rent you do not. If inflation rises, your rent rises with it.
Worked example: a starting rent of €1,000 over ten years
| Stepped rent | Index at 2 % inflation | Index at 4 % inflation | |
|---|---|---|---|
| Year 1 | €1,000 | €1,000 | €1,000 |
| Year 5 | €1,080 | €1,082 | €1,170 |
| Year 10 | €1,180 | €1,195 | €1,423 |
| Total over 10 years | €130,800 | about €131,400 | about €144,100 |
Assumptions: net rent of €1,000 per month, stepped rent rising by €20 per year, index-linked rent with steady inflation of 2 and 4 per cent per year respectively. The two inflation rates are assumptions set for illustration, not a forecast. Service charges are not included.
At two per cent inflation the two routes end up almost level. At four per cent the index-linked rent costs about €13,300 more over ten years. Anyone who needs a fixed budget takes the stepped rent. Anyone betting that inflation stays low takes the index. It remains a bet in both directions.
The checklist for the tenancy agreement
Six points I ask to see before anyone signs. If one is missing, it is open. And open here means it gets settled later, as a rule at the tenant's expense, and the tenant is you.
Waiver of notice, fixed term or open ended
A waiver for ten years is a different thing from one for life. Have it shown to you who it binds and for how long. Without a waiver the statutory position applies: the landlord needs a legitimate interest, and their notice period lengthens by three months after five and after eight years (§ 573c para. 1 BGB). Check whether the waiver binds you as well.
Decorative repairs
Keeping the property in a contractually fit condition is first of all the landlord's job (§ 535 para. 1 sentence 2 BGB). Contracts frequently pass decorative repairs on to the tenant. In a sale and rent back that deserves its own look: you kept the house in order for decades and are now expected to carry on doing so without being the owner any more. Get it in writing what exactly you owe and on what cycle.
Service charges
Your bearing the service charges has to be agreed (§ 556 para. 1 BGB). Advance payments may only be set at a reasonable level, and the account is settled annually, at the latest twelve months after the end of the accounting period (§ 556 paras. 2 and 3 BGB). Here you have an advantage no ordinary tenant has: you know the last annual statement for your own house. Put it next to the advance payment you are being offered.
Subletting
If a legitimate interest in letting part of the dwelling to a third party arises after the contract is concluded, you can demand permission (§ 553 para. 1 BGB). The landlord may make it conditional on a reasonable rent increase (§ 553 para. 2 BGB). For a large house later occupied by one person alone, that is not a side issue.
Succession for the spouse
If the tenant dies, the spouse or civil partner sharing the household steps into the tenancy (§ 563 para. 1 BGB). That applies by operation of law. It is still cleaner to write both partners into the contract as tenants from the start. Then nobody has to examine a declaration of entry when it matters.
Deposit
The security may not exceed three months' rent excluding service charges, and you may pay it in three equal monthly instalments (§ 551 BGB). On a net rent of €1,000 that is at most €3,000. The money comes out of the purchase price and is missing in the first year, so it belongs in the calculation.
How far tenant protection carries in a sale and rent back, and where it ends, for instance in a forced auction, is set out in the overview of property annuities and partial sales.
Sale and rent back against selling and moving
The honest comparison is a subtraction, not an opinion. Take the purchase price, subtract what you will pay in rent over ten years, and set that against an open-market sale where you move out and pay rent somewhere else.
| Sale and rent back | Sale and move | |
|---|---|---|
| Purchase price | €369,000 | €450,000 |
| Move and furnishings | €0 | €15,000 |
| Rent over 10 years | €130,800 | €100,800 |
| Left after 10 years | €238,200 | €334,200 |
Assumptions: detached house of 120 square metres on the edge of Dresden, vacant market value €450,000, discount for the tenancy 18 per cent. Rent in your own house €1,000 net, in the new flat 75 square metres at €750 net, both as stepped rents rising by €20 per year. A flat €15,000 is assumed for the move and initial furnishings; that is a figure set for the example, not an average. The range of 10 to 20 per cent for let properties in Dresden is explained in the overview of property annuities; 18 per cent sits deliberately at the top end, because I find it harder to place a let detached house in Dresden with an investor than a let flat. That too is experience, not a statistic. Agent's commission and notary fees appear in neither column, nor does interest on the free capital. Interest would work in favour of the right-hand column, because there is more money sitting there.
In this example the difference is €96,000 over ten years, which is about €800 a month. It is not an argument against a sale and rent back, it is its price.
Someone who sees that figure and says it is worth it to them is making a good decision. Someone who never saw it is making none at all.
Who it suits and who it does not
It suits you when a specific sum is needed
- A co-heir has to be paid outA community of heirs holds the house, one of them lives in it, the other wants their money. The sale and rent back settles both at once: payout now, and you stay.
- A remaining mortgage weighs on youThe follow-on financing has become more expensive or the bank will not extend. If the purchase price clearly exceeds the remaining debt, the monthly budget calms down afterwards.
- Somewhere else is being adapted for accessibilityA second flat is to be converted for a later move. The sale and rent back pays for the conversion, and until it is finished you go on living in the house.
It does not suit you when
- moving out would be a disasterIf you could not cope with a move in five or ten years under any circumstances, a tenancy agreement is the wrong safeguard. Then a right belongs in the land register, and that costs purchase price.
- the sum is not actually neededWithout a concrete purpose you sell a house in order to put money in an account, and pay rent for it from the first month. That does not add up.
- the move is due anywayIf the house is too big and a move is due in two years, an open-market sale brings more. You save the discount and the intermediate step.
What pushes the price down and what lifts it
The buyer does not calculate like a family that wants to move in, but like an investor. Whatever disturbs their calculation gets deducted. Whatever supports it gets paid for.
Pushes the price down
- A long waiver of notice. The more firmly you secure yourself, the less flexible the buyer is.
- A rent below the local level. They calculate with the rent, not with the price per square metre.
- A detached house rather than a flat. In my experience it is considerably harder to find a Dresden investor for a let house than for a let flat.
- A backlog of repairs. Whatever they have to fix after the purchase gets deducted beforehand.
Lifts the price
- Complete paperwork and a valid energy certificate. If nothing has to be chased up, no risk gets priced in.
- A clean tenancy agreement with a clear stepped rent, because predictable income is worth more to an investor than high but uncertain income.
- A location with owner-occupier demand. The buyer is thinking of the day they resell the house vacant.
- A second interested party. One offer is a figure. Two offers are a negotiation.
Before you accept an offer
I will work through both routes with you, the sale and rent back and the open-market sale with a move, using the market value of your property and the rent that is meant to go into the contract. Free and without obligation, even if you then do none of it.
What the discount for a let property depends on in an individual case is set out under selling a rented property.
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