Buyers should never be allowed to take possession of the home before closing because there are too many potential legal, insurance and repair issues.
Your buyers are about to close on a vacant house and must be out of their current property no later than the end of the month. There’s a delay that will push closing back to the third of the next month.
What harm could come of letting the buyers take possession a few days early?
A friend recently asked me about a family member who was buying a home and had been allowed to fix up the home prior to closing. She also had purchased new furniture as well.
Legal, insurance and repair issues
My friend voiced her deep concerns about this situation, which is fraught with potential problems.
For example, what would happen if the buyer was unable to close — could the buyer file a mechanics lien against the property for the work she did?
What would happen if one of the people working on the property was injured — who would be liable?
What if the buyer didn’t obtain the appropriate permits for the work — who would be responsible if there was a problem with the building department?
Another potential issue was the furniture: lenders often run a final credit report just prior to closing. If the buyer charged these items and this changed the buyer’s credit ratios, the lender could refuse to fund the loan because the buyer no longer qualified.
As you might expect, the deal fell apart. The title company picked up an old tax lien against the buyer that, as per her divorce agreement, was her ex-husband’s responsibility.
Nevertheless, because tax liens take so long to remove, it killed the deal. Institutional lenders almost never fund loans where their lien would not be in first position.
The sellers seemed open to reimbursing the buyer for the materials, but not for the time that she spent working on the house. Even worse, the buyer’s boyfriend ended up with all her new furniture because it didn’t fit in her existing home.
Two early move-in horror stories
Both these early possession nightmares happened to agents in my office.
In the first scenario, the buyers gave the sellers $10,000 to move in early because they had to be out of the current home. Once the buyers took possession, they decided they didn’t want to close.
The sellers received a backup offer, and because the buyers were in breach of the contract, demanded that the buyers sign cancellation papers and move out of the property. The buyers refused. The sellers took the buyers to court.
Even though the buyers had breached the agreement, the judge ruled that because the sellers took the $10,000 from the buyer, the issue would require a trial. At that time in California, the wait to get on the docket was five years.
The second scenario was even worse. The buyers and sellers became quite chummy during their deal. The house the buyers were purchasing was vacant. The buyers asked if they could have their painters come in and paint prior to closing. The sellers approved the request.
Because the painters were coming back the next day, they left some drop cloths on the floor. The property had a floor furnace that came on during the night. The furnace ignited one of the drop cloths and the house burned down.
Protect yourself and your clients
A cardinal rule to live by is to never, ever let the buyers take possession of a property prior to closing. Put your buyers up at a hotel, work out a leaseback on their existing property, or figure out any other option — but keep them out of the property.
If you have absolutely no choice in the issue and you must deal with having the buyer take possession prior to closing, follow these steps:
To properly protect all parties, you will need both a purchase agreement and a separate lease agreement. The reason that a lease agreement is required is that it allows the seller to quickly evict a tenant. Removing a “buyer in possession” under a purchase agreement is a much more difficult and costly task.
You must treat both transactions as being separate. In other words, the buyer/lessee must put down both their down payment for the purchase plus a separate security deposit and the first month’s rent for the lease.
Take pictures of both the interior and exterior of the property to document the condition at the time that the buyer takes possession. Have both parties sign off on the condition of the property prior to giving the buyer/lessee the keys.
Purchase a home warranty protection plan. Houses seem to know when the owners change, and it’s common to have multiple problems with appliances and systems right after closing. A home warranty policy minimizes the seller/lessor’s potential exposure if there is a problem on the property.
Here’s the bottom line — the next time someone has the bright idea to let the buyers take possession before closing, remember these three cautionary tales, and do whatever is necessary to avoid an early possession nightmare.