When Lexington, Kentucky, broker Nick Ratliff purchased a short sale last fall, the seller informed him that she wasn't going to move out until a week after the closing, when her new apartment would be ready for occupancy.
To complicate the matter, the seller's lender said it wouldn't extend its approval of the sale beyond the scheduled settlement date.
Still, Ratliff held his ground, insisting that the bank either give the parties one more week to settle or that the seller move as originally planned. "We stood strong," he recalls. "And after a few conversations with the bank, we got the short sale approval extended and everything went fine."
But that begs the question: Why not just allow the seller to stay in the house another seven days? Wouldn't that have been easier? What's the harm?
As it turns out, allowing a seller to remain is not a very good idea, and it's one that realty professionals almost universally warn against. It's also not terribly wise to allow the buyer to move in prior to the closing, agents in the trenches advise.
"Anytime the situation comes up, I always ask my client if they want to rent the property or sell it," says Ratliff. "By allowing a buyer to move in prior to closing or letting a seller stay post-closing, both parties are entering into a landlord-tenant agreement. This changes the entire dynamic of the relationship and adds so many more potential outcomes to the process."
For sure, the result can be a positive one. But "too many disasters can happen," cautions Bruce Lynn of Keller Williams Realty in Coppell, Texas, who suggests "never allowing the buyer to move in early."
"NEVER, EVER," Lynn says emphatically. "And while we're at it: no early contractors, either."
One thing that could go wrong is the buyer's financing. Since the house would not be owner-occupied, at least not for the period beyond the closing when the seller remains, it would be an investment property, and the lender might balk at backing a rental.
At the very least, the terms of the loan might change, with the lender calling for a larger down payment and a higher interest rate.
Insurance could turn out to be a nightmare as well. The buyer's insurance probably won't go into effect until he actually takes occupancy, yet the seller's coverage lapses at closing. Consequently, there is no coverage during the delayed occupancy. So if there is a fire during that time, who's going to cover the damages?
OK, a fire may be stretching it a tad. But what if there's an accident on the property?
Consider these other drawbacks to letting a seller stay put post-closing:
-- What if the seller's deal on his new place falls through? He would have no place to go, and would likely refuse to move until he can find another residence.
Similarly, what if the seller loses her financing, or the closing on her new place is delayed? Again, she'd have little choice but to stay put, and the buyer could not take occupancy even though he is now the legal owner of the property.
-- What if the seller damages something during his extended stay, or an appliance breaks down? Who's going to pay for that: the new owner-as-landlord, even though she's never lived in the house, or the seller-tenant? Generally, it's the landlord's responsibility.
-- Suppose the tenant leaves the house a mess when he moves out, or fails to pay for the utilities or mow the lawn. Will the owner have any recourse?
-- What if the seller refuses to pay for the time he remains as a tenant? You've already closed, so the only recourse would be to take him to court.
-- What if the seller doesn't stay for as long as she said she would? Certainly, she'll want a rebate on her rent.
Similar questions arise when it comes to allowing the buyer to move in prior to the closing:
-- What if his financing falls through? Perhaps he no longer qualifies because his credit score has fallen, or maybe the house fails to appraise. In either case, he's already taken occupancy and you're no longer a seller -- you're a landlord.
-- What happens if the buyer discovers things she doesn't like, but never noticed until after moving in? Worse, what if she finds a major issue that by law should have been disclosed, but wasn't?
-- What if the buyer damages a house that is not yet his? Or what if his movers damage something while he is moving in?
-- What if the buyer refuses to pay for the time she occupies the house as a tenant? She's already in the place, and you'll have a difficult time evicting her for nonpayment of rent.
-- What if an item that should remain with the house -- a chandelier, for example, or curtains -- disappears between the time the buyer moves in and the closing? Who's responsible?
Fortunately, all of these issues can and should be addressed in a written rental agreement between the two parties. If you don't have a written agreement, says Ratliff, "any misunderstanding can take a good deal bad very quickly."
Obviously, there should be a firm and stated limit on the time the seller will remain. And the buyer should require that a substantial amount of the purchase price be withheld from the seller at closing to serve as security.
When the seller finally vacates the property, the money can be released -- but only following a second walk-through after the seller leaves. This way, if the house is damaged in any way, there will be money set aside to pay for the repairs.
Still, the best advice is to delay the closing until the seller can clear out. A rental agreement does not insulate you from responsibility for the property. Once the place is yours, it's yours, whether you have occupied it or not.
"The key is having all parties on the same page," says Retliff. "But the 'what-ifs' of these situations always scare me. When someone else is occupying your home for any period of time, you lose power ... I'm never going to encourage my client to do that."