Pros and cons of post-closing possession

Why sellers might prefer post-closing possession

• They need time to find a new place to live.
• Their new construction or housing isn't ready.
• They are trying to coordinate a concurrent sell-buy transaction.
• The buyers won't be able to close in their timeline.
• Their kids need to finish the school year.
  
  

Why buyers may be willing to go along

• They want to make the best, most attractive offer possible, to win the seller's agreement.
• They are locked into a lease or mortgage and don't want to pay for both simultaneously.
• They are super nice and accommodating (it happens!).
  
  

Buyers who move forward with post-closing possession face at least 3 risks:

1. The seller won't leave (even for good reason)

• Overstaying will deplete the possession escrow (security deposit) that is supposed to protect buyers.
• The buyer may have to evict the seller. And litigation is slow, expensive, and most unpleasant.

• Savvy tenants know how to game the system: by asking for jury trials and lengthy continuances.
• In extreme scenarios, a seller may file bankruptcy to drag things out.

• The buyer may have to start making (unreimbursed) mortgage payments before they even move in.
• The buyer may not have alternate or temporary housing, and may wind up in a hotel, couch surfing, or worse.
• (I hate to even write this, but...) There may be a new pandemic or other disaster.
  
  

2. Under insured incidences

Picture this: The home burns down before the buyer moves in. The buyer's homeowners insurance will likely be denied as the buyer never actually moved in. The seller's homeowners insurance won't cover it because they don't own the property anymore.

The seller must have renter's insurance to cover their stuff. The buyer must have a policy that covers the structure. Both parties should work closely with their insurance agent for any post-closing possession period.

3. Mortgage limitations

Conventional VA and FHA financing terms for owner-occupancy loans require that the buyer take possession within 60 days of closing.

Renting to the seller for anything longer than 60 days (about 2 months) might be considered fraud to the lender.

If the lender finds out, they can call the loan and initiate a foreclosure. Will the lender find out? Would they foreclose? Probably not. But that isn't the sort of risk most buyers want.

Nobody wants any of these things to happen, but there is no guarantee against them either.

Sellers face risk, too

1. Expenses

The rent-back costs may be higher than the seller's regular carrying costs. The buyer's mortgage interest rate could translate to higher PITI (principal, interest, taxes, and insurance) costs. It may be cheaper to defer closing.

2. Wear and tear

If something breaks or stops working during possession, the seller will almost certainly be responsible for repair or replacement. 

We've seen sellers pay for new washing machines, refrigerators, and more. If a tree hits the roof? The seller's insurance policies might not cover it—and the seller may end up paying out of pocket.

3. Mortgage limitations

Buyers won't be the only ones in hot water with the lender. Sellers who take more than 60 days possession share the risk of the buyer's mortgage limitation—as a conspiracy to commit fraud.

4. Unreasonable buyers (the real kicker)

Spiteful or unreasonable buyers may hold the seller's possession escrow hostage. We've seen buyers refuse to release money over minor issues, like a ladder left under the porch.

Sellers can essentially be blackmailed by buyers whose feelings have been hurt or who want to "claw back" funds if they think they overpaid in the first place.

So, what is a buyer or seller to do?

Before you move forward with offering or accepting post-closing possession, we suggest you:

• Talk to your real estate broker or agent about their experience with post-possession.
  
• Retain an experienced closing lawyer early in the process—ideally before you sign a contract with a post-closing possession clause. This will allow you to understand the legalities and potentially minimize your risk.
  
• Ask your homeowners insurance agent about any risks or shortages you might face.
  
• If you are a buyer, talk to your lender about any limitations you might need to consider.

As for our firm, we take extra care when it comes to post-closing possession. At every step, we want our clients to be fully informed about what they are getting into, so they can decide what is best for them.

Schedule a call with me (Mike) or John if you have any questions about post-closing possession or any other real estate closing matter.

We're here to help you close with confidence.