Tips for Post-Closing Occupancy Agreement
Leasebacks, also known as post-possession occupancy agreements, not only help sellers but also can give buyers an advantage in bidding wars. These agreements turn home buyers into landlords and sellers into tenants. Giving a seller a few extra days to move out is fairly common. But it’s when we’re talking about more than a few days that there’s a lot more to consider, like any potential risk of loss, insurance, and rent. Here are some tips to keep in mind when your client needs to enter into a post-closing occupancy agreement.
Put everything in writing. Buyers shouldn’t let sellers retain possession of a home for any amount of time without an agreement in place that lays out all the conditions. Leaseback agreements should spell out the length of the rental period; the amount of rent per day, week, or month, if applicable; penalties for late payments; who pays for utilities; the buyer’s right to access the property; and the seller’s duties to maintain the home while they’re living there. The agreement may stipulate that the buyer has the right to inspect the property and ensure no damage was done.
Charge a deposit. The buyer may want to charge a refundable security deposit just like a landlord would. Damage to walls, for example, can occur when the seller finally moves out, and a deposit can offer protection against any losses. Consider whether the security deposit should be held in escrow or released to the buyer at closing. A security deposit can also send a message to the seller: This isn’t your home anymore, and you’ll be on the hook for damages like any tenant would.
Get the lender’s approval. Many lenders won’t accept leaseback agreements that are longer than 60 days, at which point the home can be classified as an investment property instead of a primary residence. Investment properties come with different loan terms—and, typically, a higher interest rate. Make a lender aware of any leaseback arrangements up front to make sure the buyer’s loan won’t be put in jeopardy.
Consult an attorney. A real estate attorney can review any post-possession occupancy agreements, particularly those that stretch beyond a few days, to help minimize the risks. The longer [the time period] these agreements are structured for, the more both parties will need to think about avoiding potential issues that could arise.
Know the risks. Buyers must have safeguards in case a seller refuses to leave at the end of the leaseback period, though this situation rarely occurs. Still, it’s increasingly a possibility in an environment where many people are taking advantage of eviction moratoriums. With this in mind, buyers may ask sellers to waive their rights as tenants under current COVID-19 protections. As another safeguard, buyers may hold a portion of the home sale amount in escrow and release it to the sellers once they finally move out.
August 9, 2021. Realtor Magazine. What if Your Sellers Have Nowhere to Go?.
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