Should You Allow a Buyer to Move in Prior to Closing?

Possession of real estate usually transfers from seller to buyer at closing. However, in some instances, the buyer asks the seller for early possession of the property. This happens because the buyers may have closed on their house and need a place to live or they are simply just very excited to get their life started in their new home. 

In short, from my real estate experience, you should not let a buyer move in before closing. If you decide to let a buyer take possession of your St. Petersburg home or condo before closing you should be aware of the risks. Consider these actual scenarios

1) A listing Realtor and the buyer's agent were both happy that their transaction was going smoothly. When the buyers asked to paint the interior of the house proior to closing, it was granted. Afterall, the property was vacant, and the buyers and sellers bonded nicely when they met. The painters covered the hardwood floors with drop clothes to protect from dripping paint. However, one of the drop cloths was sitting on the floor furnace. The furnace turned on during the night, ignited the drop cloth and the home burned down.

2) Some buyers wanted to take possession of the property prior to the closing. The sellers agreed but only if they released part of their escrow deposit to the sellers. The buyers moved into the property and decided not to close on the transaction. The sellers were forced to file a lawsuit. At the preliminary hearing, the judge ruled that because the sellers had taken part of the buyer's deposit, the buyers now had a financial interest in the property. Because so many lawsuits on file it took five years before the case could come to trial. In the meantime, the sellers were stuck with no recourse.

Early Possession Pitfalls

Sellers make the final decision as to whether an early possession makes sense for their transaction. Listing agents usually discourage such situations because too many things can go wrong. For example:

• The sale might fall through due to a mortgage problem, meaning the buyers' loan can't be approved. Should this happen, the listing agent and seller are back to square one, trying to find another buyer for the property, but this time with a renter in place. Hopefully, the buyers vacate if their financing falls through. If not, the seller might have to take legal action to get remove the old buyers. No one needs that headache.
• The buyers might feel that they already own the house and might start making ugly changes. The owner and future buyers may not like these changes. If the house doesn't close, the owners may be stuck with the lousy buyers' improvements and may need to spend thousands of dollars to get the home back in shape to sell.
• The buyers might start making lists of extra repairs they want to see completed before closing. Sometimes, these repairs are not genuine or perhaps problems created by the buyers usage of the property. This can be very frustrating if buyer and seller have already gone through the inspection and repair process.
• The buyer lacks integrity and has no intention of closing on the house in hopes of staying in the home until the legal action forces them out of the property.
• The buyers are pigs, trash the house, and then never close.
• The buyers injure themselves in the property and then sue you.

Ocassionally, there comes a time when early possession is a good idea to keep the transaction together. Here are some steps to take to protect all parties.

1) Create a Seperate Lease Agreement That Includes a Security Deposit

Legally, it is usually easier to remove a tenant in possession versus a buyer in possession. To protect the sellers' rights in a situation like this, it is important that the buyers and sellers sign a seperate lease agreement. Also, until the transaction closes, the buyers are tenants and should pay a seperate security deposit, that is not related to the earnest money deposit put down on the real estate purchase. 

2) Hire a Professional

Don't play lawyer and create a lease agreement yourself. Use one that is generated by an attorney. Don't be cheap. Realtors usually can provide an agreement that protects everyone. Also, if you are having an attorney process and close the transaction, they might be able to provide a document free of charge.

3) Make Sure You Have the Right Insurance

Many sellers make the mistake of thinking that their current home owners insurance will cover buyers who take early possession. Before you let a buyer move in to the property make sure you contact your insurance agent to find out what is required regarding a short term rental. You might have to pay a little more money for the appropriate coverage. It is definitely worth it in case the buyer burns the house down or gets injured on the property.

It is also important for buyers to know that the sellers' insurance does not necessarily cover their personal belongings or liability coverage for the buyers. The best way for the buyers to protect their interests is to purchase a renters' insurance policy. The sellers should require this in the lease agreement to protect themselves from claims.

4) Consider a Home Warranty

Let's say the buyers move into the property in the middle of a hot St. Petersburg summer and runs the air conditioner on 60 degrees until it breaks. Should the seller fix this or is it the buyers problem? To provide extra protection, the parties should agree on a home warranty policy. That way, if there is an issue with a major system on the property, there won't be a conflict about who is going to pay for the repair.

5) Document the Property

The condition of the property is often a major source of conflict if the buyers fail to close. The sellers should take extensive photos and shoot a video prior to the buyers taking possession of the home. If there is a dispute, the sellers will have proof of the prior condition of the property. 

Conclusion

It is best for sellers to not allow buyers to take early possession. If it cannot be avoided then make sure the buyers sign a lease that is created by a competent attorney that protects all parties. Contact your insurance agent and make sure you are properly covered. Consider buying a home warranty that could prevent fights over major broken items in the house. Finally, document the house thoroughly with photos and videos so there is no question about the condition of the home prior to the possession.