Protecting the Seller When a Buyer takes Possession Prior to Close of Escrow
I usually discourage giving the buyer possession of a property prior to actually closing the sale, but with the current situation in the lending environment, it may become necessary to do this more regularly.
In California, we have a form called “Interim Occupancy Agreement” that spells out the terms of this arrangement. It is basically a short-term lease that references the purchase agreement, projected close of escrow date, and what to do if the escrow is terminated without closing. There are a lot of check boxes and blanks to fill in, but it has been designed and worded by California Association of Realtors’ (“CAR”) legal department, so it should meet the needs of most buyers and sellers.
Since the seller is essentially doing the buyer a favor by allowing an early move-in, the seller should dictate the terms that would make him comfortable about taking this risk. How much risk is there? Looking at it from a “worst case” scenario : the buyer moves in, trashes the house, doesn’t pay the agreed upon rent, fails to close escrow, and the seller must pay to legally evict him, then clean the place up, and continue to own the property making mortgage payments, taxes, insurance, etc, until it closes with a new buyer. Additionally, in our current soft market, delaying a sale for several months could easily cost the seller several thousands of dollars in lost sales revenue!
When offering early possession, you must hope for the best, but plan for the worst, in order to protect the seller.
Prior to possession the buyer must:
- Sign all escrow instructions and disclosures and have all contingencies removed in writing.
- Conduct a final walk-through inspection and sign the “Final Verification of Property Condition.”
- Provide evidence of insurance.
- Pay a substantial security deposit (3% of sale price) directly to the sellers in a cashiers check. An amendment to escrow signed by all parties will document this for the lender to calculate net proceeds that the buyer must bring to the closing. (This amount should come close to covering legal eviction expenses, replacement of carpet, new paint, and repairs to most damage.)
- Pay a slightly higher-than-market daily rental amount due in advance each week until close of escrow. (This is to encourage them to close sooner, rather than let it drag out.)
While I think this is a very one-sided agreement, the seller is taking all the risk and the buyer is benefiting by early possession.
Sample Verification Of Property Condition (pdf) “Walk Thru Form”
Sample Interim Occupancy Agreement (pdf) “Occupancy Agreement & Short Term Lease”
If y ou have any additional questions, suggestions or advice, I welcome your comments.
