More and more, we are seeing Temporary Occupancy Agreements (GAR F219) so sellers can remain in their properties post-closing. Here are a few tips for navigating the form.
Maximum Temporary Occupancy is 60 Days
The GAR Temporary Occupancy Agreement is designed to cover the Seller remaining in the property for up to 60 days. If the Seller needs longer than 60 days, a lease should be used. The reason is that, if the buyer has purchased as an owner occupant, lenders consider 60 days the cut off for determining whether the owner is an owner occupant or an investor. If the lender determines that the new owner is actually an investor, the new owner would be in default of the loan. The interest rate could increase or, worse, the owner could be accused of mortgage fraud.
Tip: Don’t allow a post-closing occupancy to be more than 60 days. Use a lease form if the seller requires more than a 60 day occupancy. More than 60 days may not work if the new owner will be an occupant.
Watch Out for Insurance Issues
Once ownership of a property changes, insurance coverage changes too. The seller’s owner occupant policy no longer covers the seller. The buyer is now the owner. If there is a flood or a fire, the new owner’s policy covers the real estate, but not the seller’s personal property.
Tip: Make sure the seller contacts his insurance carrier for advice regarding personal property coverage during the temporary occupancy.
The New Owner is Responsible for Maintenance and Repairs
Once the closing takes place, the new owner is responsible for the maintenance and repair of the property. The previous owner is not. The old owner is just a tenant. Unless the old owner has damaged the property beyond normal wear and tear, they are only responsible for their own personal property.
Tip: Advise your buyers, before they agree to a seller remaining in the property post-closing, that they are responsible for the maintenance and repair of the property post-closing.
Make a Hold Over Period Hurt
Once the agreed upon temporary occupancy has terminated, a seller that remains in the property is holding over. If the seller doesn’t leave voluntarily, the new owner may have to evict. Evictions cost time and lots of money. Therefore, make the daily cost of holding over a significant one. If the daily cost is minimal, the seller has no incentive to leave.
Tip: Include a large per day hold-over fee. Make it hurt. $500 or $1000/day would incentivize a seller to leave on time a lot more than a small fee.