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.