Moving In Before the Closing

I’m currently in the midst of a transaction in which the buyer of a property wants to move into their new property before the closing.  Sometimes I regret that I work in one of the few real estate markets where I as agent can’t draw up contracts.  In this particular instance I’m thrilled that attorneys are involved because I don’t completely understand the legal ramifications of pre-possession (when the buyer moves in before closing) or post-possession (when the seller stays in the property after closing) agreements.  Zillow blog’s Wiki Wednesdays has a great post today referencing Greg Swann’s ( of Bloodhound Blog) article The Perils of Pre- and Post-Possession.

Swann wisely points out that it isn’t always clear to insurance companies who is covered under who’s policy should the house burn down, etc.  He suggests, and I concur as do almost all attorneys I have asked, that pre or post-possession agreements are "bad ideas:"

Why? Because they create a de facto tenancy. It may be just a friendly agreement between buyer and seller, but when you occupy a home you do not own, you are a tenant. You should ratify the occupancy with a lease. But there is still potential for big trouble.

Suppose the house burns down. Who is liable? The owner, even though he is not occupying the home? Or the occupant, who is not the owner and probably just lost all of his personal property?

But that’s what homeowner’s insurance is for, right?

Maybe not. If the owner did not disclose the tenancy, the insurance company probably will not pay on the house. If the occupant had homeowner’s insurance, not a tenant’s policy, his underwriter also might refuse to pay for the lost personal property. There may be two aggrieved lenders, and both might call their notes due, even though the house is now destroyed.

But the worst is yet to come. Everyone involved gets to spend years in court fighting over who owes what to whom. The owner will be out the value of the house. The occupant will have lost all of his portable wealth, including the memories attached to those things. Everyone will emerge from this lengthy process bruised, begrudging and much, much poorer.

Greg’s advice to those considering these types of agreements:

Take possession at the close of escrow, just as the purchase contract advises. Whatever convenience you might enjoy from pre- or post-possession, the risks are just too great.

As I’m seeing in this current transaction, many of the "friendly" things that were agreed to in the contract have been cause for debate between buyer’s and seller’s attorneys.  Certain items suddenly aren’t conveying with the sale and the closing date and terms of pre-possession agreement have become "cloudy" over time.  The contract itself is not well written and in this instance, the buyer wants to do work in the new apartment prior to closing.  In my humble opinion, this is a potential recipe for disaster for all parties involved…and for what…to save a few days time in the spirit of being more "efficient?"  This could end up being one of the most inefficient decisions that these parties have made…only time will tell.

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6 Responses to Moving In Before the Closing

  1. avatar Greg Swann says:

    Ah, fun for everyone. I wrote that little essay after an agent gave me a huffy lecture on the phone about how “we’ve always done it this way.” That same agent tried to convince me that the buyers should pay for the sceptic tank inspection — which I expect doesn’t come up every day in The Big Apple.

  2. avatar anon says:

    I’m seeing less traffic at the open houses I go to (large family apartments on the UWS), but brokers are claiming that they have offers and apartments seem to go into contract very quickly if even half-way reasonably priced.

  3. avatar jf.sellsius says:

    As an attorney who has done closings for over 20 years, I can tell you the odds of something going wrong, as depicted in that wiki article, are slim, if experienced attorneys are involved. They pose a real risk only if a non-lawyer is drafting the rider. Are the risks zero? Of course not. But a well drafted rider, sufficient escrows, strong penalty provisions, short occupancy period and notice to insurers, usually protects all parties. IS pre or post closing recommended? Of course not. But is it never applicable? Of course it’s useful & a good idea to avoid a definite loss. A risk of loss is better than a definite loss.
    That article was misleading in part because it rendered a legal opinion as to de facto tenancy. Under what state law is that legal conclusion based? Any attorney worth his salt makes certain there is a provision that the pre or post possession does not create a landlord tenant relationship. It’s real estate law 101. Greg is from Arizona and they don;t use attorneys at closing. Hence they probably end up in court when a non-lawyer drafts the pre or post possession rider. No wonder.
    If every person who occupied your home is a de facto tenant that would include your housesitter, a vagrant squatter or your Aunt Bessie who overstays as a guest.
    I do agree with you, however, that under no circumstances should ANY WORK be done prior to transfer of title.

  4. Thanks Joe. Great insight from a savvy attorney is always refreshing. In my 15 years, most attorneys with whom I have worked have strongly suggested staying away from pre or post closing agreements. I have certainly had my share of them though and fortunately never with any “issues.” having said that, they still make me nervous. The “cleaner” the transaction, the better for all involved in my opinion.
    By the way, my de facto parents just left Sunday…nice visit…I won’t be taking them to court.

  5. Great advice! Does any of this change if the transaction is between family. I assume it wouldn’t change anything. Just wondering.

  6. I don’t know but I would also think that same applies for family members particularly if there is any concern. I would defer to an attorney to answer this. I personally have a different set of rules for my family…after all the presumption is that I like them 😀

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