Q: We have sold our house in Virginia and will be moving to another shortly. Because of the busy real estate market, our buyer's lender has not yet been able to give a firm loan commitment. We feel confident that our buyers will get their loan soon. Our buyers would like to move in before settlement, and we are willing to accommodate them. However, we do not know the legal ramifications of such a transaction.
A: This has become a very common problem in today's market because of the heavy application demand on mortgage lenders throughout the area. This is especially true if the borrower is attempting to get a mortgage insured by the Veterans Administration or Federal Housing Administration.
While I recognize that you would like to assist your buyers, permitting the buyer to move in before settlement, in my opinion, can be very dangerous. First, from the seller's point of view, this gives the buyer an opportunity to find out all sorts of things that they feel may be wrong with the house, and they may use these against you at settlement. Second, there are insurance questions that have to be considered, since you will no longer be in control of the property -- even though you still own the house.
If a fire occurs during the occupancy of the purchaser, for example, whose responsibility is it?
If you are prepared to let your buyer move in before settlement, you should draw up a written agreement that contains at least the following points:
The purchaser agrees to occupy the property and will pay an agreed upon amount, usually based on a per day formula, for the reasonable rental of the property.
The purchaser agrees to place the balance of the down payment with the title attorney or title company, to show good faith. If for any reason the purchaser does not actually complete the settlement, the agreement should spell out that all or part of the deposit will be forfeited at the option of the seller.
The purchaser will have a preoccupancy inspection of the property, and will agree to accept the property in its present condition. Thus, at the settlement, the purchaser will not be permitted to raise questions as to the condition of the property. For all practical purposes, it will be treated as if settlement took place at the time of occupancy.
The purchaser is obligated to maintain the property in the same condition as of the date of occupancy, subject only to reasonable wear and tear. The purchaser is also obligated to pay all utilities as of the date of occupancy.
The seller will be permitted to inspect the property on a periodic basis until settlement, during reasonable hours and on reasonable notice.
If possible, a date should be set for the settlement.
If you are working with a preoccupancy agreement, bear in mind that it is a legal document that spells out the terms and conditions for the buyer to move in before settlement. The seller should make it very clear that this is not a lease, and the buyer should not be considered a tenant -- but rather a licensee.
Otherwise, the seller may find that the only way to get the buyer out of the property, if settlement does not take place, is to go to the landlord-tenant court, which is expensive, time consuming and uncertain.
I am opposed to allowing a purchaser to move in before settlement. However, there may be instances where it is in everyone's interest to permit the preoccupancy, but such preoccupancy should be cautiously and carefully entered into.
Benny L. Kass is a Washington attorney. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1060 17th St. NW, Washington, D.C. 20036. Readers also may send questions to him at that address.