From a risk management point of view, permitting a buyer to have possession prior to close is NEVER a good idea. Why? There is too much potential for something to go wrong.
Here are 10 scenarios to consider:
1. What happens if the buyer is unable to close?
2. What if they decide they don’t want to close OR move out?
3. What if the buyer makes a large purchase prior to closing and no longer qualifies for the loan?
4. Someone is injured – who would be liable?
5. What if the buyer damages the property?
6. What happens if the home burns down, or is significantly damaged?
7. What if the buyer didn’t start their insurance early and a claim needs to be made?
8. What happens if the insurance won’t cover damage to the property?
9. What if the buyer does repairs and then can’t close? Could the buyer file a mechanic’s lien against the property for work completed?
10. What if permits for the work completed were not pulled?
And the list goes no….
As agent, protect your client by never permitting a buyer to have early possession. Even in the most dire circumstances, there are options: they can stay in a hotel, lease back their existing property, stay with family etc.
In the event that you have absolutely no choice in the issue and you must deal with having the buyer take possession prior to closing, follow these steps:
• To properly protect all parties, you will need a separate lease agreement. A lease allows the seller to quickly evict a tenant. Removing a “buyer in possession” under just the purchase agreement is a much more difficult and costly task.
• You must treat both transactions as being separate. In other words, the buyer/lessee must put down both their down payment for the purchase plus a separate security deposit and the first month’s rent for the lease.
• Take pictures of both the interior and exterior of the property to document the condition at the time that the buyer takes possession. Have both parties sign off on the condition of the property prior to giving the buyer/lessee the keys.
• Purchase a home warranty protection plan. If there are problems with the home’s systems or appliances, a home warranty policy minimizes the seller/lessor’s potential cost and exposure.
There are many horror stories out there that expose the risk of early possession. My strong recommendation is that you not add to the list of tales of woe. Make it your cardinal rule to never, ever let a buyer have possession prior to closing.
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