A high-risk low reward play: It happens every so often: For some reason or another the sellers need to stay in the apartment after the closing. It could be because the sellers new apartment isn’t quite ready, the buyers want (or must, because of a mortgage issue) to close early, or some other similar scenario. But no matter what the reason, there are serious risks involved and almost all of them are on the buyers back.
It often starts with a simple request: “We can close on the 15th, but my clients (the sellers) need to stay until the 30th and don’t worry, we will adjust the maintenance as of the 30th”. The sound bite sounds simple and rather harmless but there are real risks in such a situation, among them the following:
1) What if the sellers do not move out when promised? The buyers might find themselves in a lengthly and costly “landlord/tenant” dispute in Court which they should ultimately win but at what cost of time, money, and aggravation?
2) What if the sellers damage the apartment during their stay or the move out? The buyers might find themselves wondering: “I could have sworn that closet door wasn’t broken”; or “I don’t remember that large crack in the marble sink”.
3) What if the sellers take something that was included in the sale or fail to remove something they were supposed to take out? The buyers might be saying: “Hey, wasn’t there an air-conditioner in our living room window” or “Wasn’t that huge ugly armoire supposed to be taken out of here by the sellers”?
4) What if someone gets hurt in the apartment while the sellers are staying there? The sellers guest slips and falls on a slippery tile floor and expects to be compensated for her broken hip and pain and suffering. Time for buyers to take a good hard look at that insurance policy and of course, call their lawyer because they are probably about to be involved in the middle of a lawsuit.
5) What if the sellers kid overflows the tub causing a leak that damages the downstairs neighbor’s fancy and recently renovated bathroom? Take another look at that insurance policy.
6) Who pays the buyers carrying costs (maintenance, mortgage, insurance, gas, electric, etc.) during the sellers extended stay? These should obviously be on the sellers’ dime, but who pays these costs should be decided upon before the closing or the buyers will be stuck paying them.
7) And the biggest nightmare- what if bedbugs arrive? The buyer will be responsible to cope with removing the critters unless they agree to something else before the closing.
Most of these risks can be alleviated by a “Post Closing Possession Agreement” which should deal with these types of issues. These agreements usually require the sellers to leave a fair amount of cash in escrow with the buyers lawyer to cover the obvious out of pocket costs (penalties for staying beyond the agreed upon date, etc.). However, the amount of that “fair amount of cash” is often hotly contested, as are the parameters for who gets that cash and when.
To help reduce the risks, it is a good idea for both sides to check their insurance policies to make sure of who and what is covered. Another idea is to take photographs or a videotape of the apartment to help establish its condition on the closing date.
If there is a dispute which cannot be resolved by a few telephone calls, the post-closing possession agreements usually provide for the escrowed amount to continue to be held in escrow or deposited into Court until the parties settle or finish battling it out. Yes, it becomes an ugly mess that could have been avoided with a simple, “No thank you, we don’t do post-closing possession arrangements.”
There is also risk on the sellers side. What if the sellers leave the apartment in perfectly good shape but the buyers claim that things were broken or missing and tell their lawyer to hold onto some of the money? Now, the sellers have to go to Court to fight for their money, an ugly situation that could have been simply avoided.
My feeling is that if the deal or circumstances demand it, then by all means enter into a post-closing possession agreement, but at least do it with your eyes wide open as to the risks involved.