Move in without closing first? Whoa! I just got an offer on a Destin Florida short sale listing with an early occupancy clause. The buyer wants to move into the property before closing and short sale approval. Is that a good idea? One of the negatives of short sales is the waiting time for the buyers during the short sale process. It could take 60-120 days for a short sale approval, then another 30 days for the buyer to close. Some buyers “bail” because they get wandering eyes or are tired of waiting so long. The solution for some sellers, to keep a buyer in the sale, is to allow the buyer to move in early. This could be a bad idea, but there are some things short sale sellers can do to lessen the risk.
1. Require the buyer to complete and remove the home inspection contingency prior to move in. Why? Removing this contingency overcomes one hurdle to successful closing. Since most short sales are sold “as is” with the right of buyer to inspect and accept or reject the property, you’ll have that clause of the way. Also, it might lessen those phone calls to the seller as a landlord after the buyer has moved in.
2. Require a lease. This may seem basic, but without it, you might lose legal protections if the closing does not occur and you have a tenant you don’t want. Who negotiates the lease? Not me. Property management is a specialty, and it’s not mine. I refer my clients to a professional property manager, or they make their own lease if they are experienced with rentals.
Should a short sale seller allow early occupancy? It's not my decision, but I’ve had several successful short sales where the seller did negotiate early occupancy and allowed the buyer to move in early. In these cases, we knew the short sale was likely to be approved, the buyer was pre-approved for a mortgage, the earnest money was deposited, the inspection contingency was removed, and of course, there was a lease.
If you are considering short sale to avoid foreclosure, be sure to consult an attorney and an experienced Destin Florida short sale agent.
It's Wendy!
Wendy Rulnick, Broker, Rulnick Realty, Inc.
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Wendy is a short sale and pre-foreclosure specialist and has been featured in "Kiplinger Personal Finance Magazine" and "Florida Realtor Magazine". Call Wendy Rulnick, Broker/Owner, to list and sell your home or condo on the Emerald Coast of Florida in Walton, Okaloosa and Santa Rosa County- Destin, Santa Rosa Beach, Fort Walton Beach, Niceville, Bluewater Bay, Navarre, Seagrove Beach, Watercolor, Sandestin, Seaside, Crestview, Rosemary Beach, Mary Esther, Shalimar, Eglin AFB, Hurlburt Field.
IMPORTANT NOTICE: Rulnick Realty, Inc. is not associated with the government, and our service is not approved by the government or your lender. Even if you accept this offer and use our service, your lender may not agree to change your loan. If you stop paying your mortgage, you could lose your home and damage your credit.
Comment
My Seller/Client has authorized early occupancy to the eventual buyer four times, about 10% of my deals. In each case, it has worked out well. A double-edged sword, no question. The benefit being that you lock-in the buyer's commitment, which could be the drawback, if you need them to move out.
But, the reality in my cases is that, if "move out" were required, then the deal collapsed and the chance of foreclosure is also high, so it may really be a "no lose" to the Seller. (If I am in default and have no equity, what is my risk exactly?)
In short, conventional wisdom may say no, but short-sale reality may say yes.
Regarding, rights, I don't need to consult my attorney to agree with Bryant on this, for my business. (Not advice.) Absent an assignment of the lease, the Seller surely has "right of use". (Or, is someone suggesting that the Seller of underwater property, who has defaulted on their mortgage, does not have the right to hold an outdoor graduation party on their property and charge $5 admission?)
Regarding the principal residence requirement in the Mortgage Debt Forgiveness Act, I rather doubt that early occupancy would jeopardize this. One year lease, could well be a different matter. Thanks to the person who raised this concern, I had not thought of this.
What if you don't have an apprvoal yet and the lender finds out they have moved in and up's the sales price?
A Lease requires evictions in my state to get them out if the buying process fails and they refuse to leave on their own (many do with the prospect of free rent)- that could keep the renters/hopeful buyers in there for up to 6 months and a legal process costing $ to get them out. I say no go. Every state is probably different. Also the lenders would like that rent money and during occupancy checks are not fond of renters period unless it is a known rental unit and not the primary residence.
I have to admit when I first started reading post I thought the idea was crazy but I think I have changed my mind. There were a few properties I sold short that had tenants in it and the bank knew it and we closed no problems. If the sellers are behind in their mortgage, receiving rental income in most cases would not help sellers become current with their lender. If sellers need to move on to take another job in a different town this could be an excellent solution for all involved if handled by the right professionals as Wendy described. This also keeps the buyers invested in the transaction and I don't see them walking away from the deal in that circumstance.
Valerie. It is not bank fraud for a seller to receive proceeds from a short sale. Heck I just had Chase give the seller $20,000. And what about HAFA? Now some lenders certainly have guidelines prohibitting the seller from receiving proceeds BUT rental income is not proceeds from a short sale. We still have private property rights. A property owner can rent their property. And there is no law that states these funds most be paid towards a mortgage payment.
I guess I meant to say that I have sold many short sales that were rented out. The seller were collecting rent and not making their mortgage payments. While this may not be the right thing to do it is not illegal.
Remember lenders make guidelines not law. This is a legal issue.
Hi Bryant,
I, too, sell investment properties all the time that are rented. And I'm aware that the sellers still own the house. But these sellers are asking the bank to accept less than is owed to them in order to sell their house. It is considered bank fraud for a seller to receive any proceeds from a short sale. I'm just asking how is accepting rent any different? We're all speculating here and an attorney, accountant, or bank representative would probably be better suited to answer this. It's easy to give advice to a client, but what happens if they get in trouble for it later? If you have something in writing that states it's OK for a short sale seller to do this, I'd love it if you'd share it with us so we can take this step with confidence.
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