It’s unusual for buyers to move into a home they’re purchasing before the transaction closes. Typically, the sellers turn their home over to the buyers at or after closing.
There are potential risks with buyers taking early occupancy. For example, what if the buyers decide after they’ve lived in the home for awhile that they don’t like it and they move out? They then cancel the contract and request that their deposit be returned to them.
Who is entitled to the deposit when a buyer defaults on a purchase contract is a legal question. The buyers and sellers would need to consult their real estate attorneys for an opinion on who gets the deposit.
Real estate law is rarely black and white. The buyers might not be keen on the home because they discovered defects after they moved in that hadn’t been disclosed to them during the transaction. This could lead to a legal battle that might delay the sellers putting their home back on the market.
There could be considerable costs if the house needs to be spruced up for sale again. If the market has changed, the property might not sell for as much as it did the first time. Add to this the costs of carrying the house: mortgage payments, insurance, maintenance, property taxes, and homeowners association dues, if there are any.
Other concerns have to do with insurance coverage. Who’s responsible if the buyers have a party and one of the guests falls and is badly hurt? Who’s responsible if some of the buyers’ possessions are stolen from the house?
HOUSE HUNTING TIP: Even though there can be serious problems with buyers taking possession before closing, there are times when it makes sense for the sellers to allow the buyers to move in early.
Make sure there is a written agreement that is specific to this situation where the buyers are taking early occupancy and is not a conventional lease agreement. Set the per diem fee high enough to give an incentive for the buyers to close as soon as possible and to cover the sellers’ carrying costs.
The agreement should provide for the buyers to take over the utility payments and carry insurance to cover their personal property, which won’t be covered by the sellers’ insurance. Also, ask the buyers to have their own liability insurance to cover any incidents that might occur during their early occupancy. The sellers shouldn’t cancel their homeowners insurance until closing. It will provide coverage for fire damage. It’s also a good idea for the sellers to continue yard maintenance.
Recently, a closing in Berkeley, Calif., was delayed due to the lender. The buyers had worked diligently to close on time. The lender told them their loan was formally approved and that there would be no problem closing on time.
The buyers had sold their San Francisco property. By the day they had to deliver possession to their buyers, the lender hadn’t issued loan documents to close on the Berkeley home and there was no certainty as to when they would.
The sellers of the Berkeley home had moved out of the house to make it available to the buyers on the contract closing date. They were convinced the buyers were qualified to buy the house and that they’d close the deal. So, they agreed to let them take early occupancy. In addition to a hefty per diem fee, the buyers agreed to pay a nonrefundable deposit if the transaction didn’t close. The closing occurred almost four weeks late.
THE CLOSING: Given the current lending environment, we are likely to see more situations like this. Although risky, there are times when it makes sense to be flexible.
Dian Hymer, a real estate broker with more than 30 years’ experience, is a nationally syndicated real estate columnist and author of "House Hunting: The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer’s Guide."
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