The possession of a home usually transfers from the seller to the buyer at closing. However, in some instances, the homebuyer may request to move in prior to that date.
This type of request isn’t uncommon because the timing of the sale may not work out precisely as a buyer would like. Perhaps a buyer’s apartment lease is up at the end of the month and closing isn’t until the seventh. Or the sale of a buyer’s previous home doesn’t line up with the purchase of the new home, leaving a buyer in a bind as to what to do with housing and their possessions for a short period of time.
Is Early Possession/Early Occupancy a Good Idea?
No, early possession or occupancy is risky, but many can be addressed through a written agreement, signed by both parties. Allowing a new buyer to move in early exposes the seller to some significant risks. Let’s look at some of the issues that might arise when granting early possession/early occupancy:
Mortgage Underwriting Problems
Not every real estate transaction goes smoothly. There can be delays in the underwriting process and last-minute requests for additional or missing information.
There might also be a last-minute mortgage denial because the borrower was issued a pre-approval letter without being properly qualified. There may also be an unexpected title issue or the home doesn’t appraise as expected.
Unwanted Improvements by the New Owners
Even though no transfer documents have been signed, a buyer who is permitted to move in early may believe that the house is already theirs—and also think that they can start making changes that may be unacceptable to the seller. Painting the master bedroom purple may not be a big deal, but if the buyer in early possession starts renovating cabinets and updating the kitchen, it could be problematic if the sale doesn’t go through. The seller may be burdened with a torn-up kitchen that cannot be put back together and thus they are required to spend a large amount of money to remedy the situation. Even if it is simply a new color in the bedroom, the seller will have to delay putting the house back on the market to repaint or sell the benefits of a purple master bedroom!
Additions to the Repair List
When a buyer is permitted to take possession prior to closing, they might start making lists of additional repairs they want to have completed before the transaction is closed. Frequently, these repairs aren’t genuine but are merely things the buyer would like to see repaired. Or a repair could be something the buyer has damaged in the early possession period, which creates a question of who should pay for the repair. Moreover, these additional repairs are particularly upsetting to the seller because the transaction has most likely gone through the entire inspection and repair process.
Contingency Sale
Another situation where early occupancy is discouraged is when a buyer is also trying to sell his or her old home. There’s no guarantee that this sale will close on time. If the buyer’s purchase is contingent on the other sale of a different property, there are multiple risks and potential issues that can arise which may impact closing.
Sellers Should Insist on a Written Agreement for Early Possession/Early Occupancy
Of course, the best transaction is a pleasant one where both parties get along and are understanding. In fact, to encourage a sale, a seller may even want to help the buyer by allowing them to take possession before the closing. However, as described above, there are a number of risks and plenty of potential for problems.
If a seller does want to grant a buyer early possession, they should insist that the buyer sign a written agreement. This is a contract that’s separate and distinct from the purchase agreement for the home. This agreement is a rental agreement for a specific term—two days or two weeks or two months—in which the duties and responsibilities of both parties are outlined.
Why Should I Sign a Separate Agreement?
The buyer or now, a renter, has a list of his or her obligations for the early possession term. This contract will make clear who will be liable for things such as utilities, trash removal, HOA fees, homeowners’ insurance, landscaping services, and repairs. The lease agreement will also state the amount of rent owed to the seller and when it’s due.
For the home seller, this rental agreement makes it easier and less expensive to evict the buyer under the terms of a lease than when it’s a handshake deal. The lease should detail what would occur if the sale doesn’t close on time or if the sale falls through. The seller also can address the issues discussed above, like prohibiting any home improvements without the consent of the owner, or that the buyer will reimburse the home seller to return the home to its former condition if the closing doesn’t occur.
Takeaway
Early buyer possession is typically not a good idea without a separate written agreement outlining the terms of the early occupancy. If a seller decides to allow this, they should insist that a written agreement be signed by the home purchaser. This protects the seller’s investment and eliminates some of the risks involved.
Hi, I'm Jeremy Danilson, a native Iowan and founder of Danilson Law.