Is Early Occupancy OK for Short Sales?

 

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.

Call toll-free 1-877-487-9639 or local 850-650-7883 ext 204

Email Wendy: [email protected]

Destin FL Real Estate

Destin Short Sales & Pre Foreclosure Help.

Read Wendy's Destin Real Estate Blog

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.

 

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Comment by Dr. Rodney K.Elkins on May 22, 2011 at 12:43pm

I really enjoy reading the responses...different perspectives...refreshing and educating...thanks everyone for continuing to participate in discussions like this

 

Comment by The Negotiator on May 22, 2011 at 11:06am

@ Thom Colby

Ummmm no... moving in violates arm's length? NO it does not. A new lease disclosed to the lender? What lease? There is no money changing hands before closing. You don't represent the lender or have their best interests at heart. God knows they don't have the homeowners best interests at heart.

 

If its a vacant house then go for it ... the lender would love someone moving in to start maintaining the property.

Comment by William "Andy" Alford on May 22, 2011 at 10:02am

I recently closed a short sale listing where we did a three week preoccupancy.  Closing date was already set, home inspection done (home was sold "as is")  and bank approval letter was in hand.  Buyers were out of a lease, and it saved them having to store furniture and live in a hotel.  However, my motivation as a listing agent was to raise some preoccupancy money for my unemployed client who owed back HOA dues that he would not have otherwise been able to pay (both agents were already making a contribution). 

I don't like pre or post occupancy agreements, but this worked out well for everyone.  Seller had some protection because our (Northern Virginia) preoccupancy agreement exempts buyers & sellers from our state's tenant-friendly landlord-tenant laws and allows prompt eviction if the sale falls apart. 

However, I believe that the answer to the query is going to depend on where you are in the short sale process, local laws and practices, the representations made to the seller's lender, and your experience and history with the other agent.

Comment by Damon Botticelli on May 22, 2011 at 8:09am

We (Las Vegas) have about 11,500 home on the market about 50% of which are short sales.  There are another 11,000 or so homes in contract, 62% of which are short sales.  However we are typically closing about 3000 homes per month, only 25% of which are short sales.  11,000 in contract (fairly consistent over the past year) but we're only closing 3000/month. 6800 short sales in contract, but only 750/month actually closing.  ---- MY point is the average buyer is putting 3-4 homes in contract and cancelling when another opportunity comes along.  Bailing buyers have become a huge problem here in the Vegas market for short sale sellers and agents and banks.  (Although I don't have much sympathy for the banks, I do believe that what hurts the banks also hurts our market, but that's a topic for another discussion.)

 

I think the lease prior to close makes a lot of sense, you just have to be smart about it and Wendy has already made some great points about how to handle the situation.  Done correctly, it shouldn't be any different than short selling a tenant occupied property.  As in any deal, the buyers and sellers need to be informed of the possible risks and decide if it makes sense for them.

 

Naturally, you have to read the Arm's Length addendum carefully and when in doubt, disclose, disclose, disclose.

Comment by Thom Colby CA Brkr 888-391-5245 on May 22, 2011 at 7:24am

My opinion is "NO". 

I believe it's no longer an Arm's Length Transaction if they do move in and it needs to be disclosed to the lender(s) the Buyer is now living in the property on a newly executed lease.  Also, is the Buyer jeapodizng their financing by moving during the underwriting process?  They have to disclose that as well.

 

For a multitude of reasons, this could go badly.  If teh short sale is not approved or the buyer can't get financing, or the bank raises the price (as we're seeing here in SoCal) you will have a tenant who will likely not move out.

I think this is a lawsuit waiting for a lawyer....

 

Thom Colby

Broker

Newport Beach CA

Comment by Sue Irwin on May 22, 2011 at 7:20am
Thanks Raymond. I agree. If I had done this in a current transaction it would have been a disaster, and all the principals were for it when the option came up. Things changed drastically now that escrow has opened and one of the parties has shown their true colors. We never know how the most cooperative-seeming clients are going to react in certain situations, and the surprises can be a nightmare. One less issue to worry about? I'm all for it.
Comment by Raymond Kennedy on May 22, 2011 at 6:53am
Bad! Bad! Bad! Idea. This is bad even on a regular transaction because there are so many factors that could prevent the deal from closing. Add the complexities of the Short Sale and you are asking for trouble. Once the occupancy takes place you now have to abide by state laws on how to get them out of the property if the deal doesn't close. In Illinois the only person that can evict someone from a premise is the sheriff and this could takes months to process through the courts and cost the existing seller money. During the process how open do you think those people will be to showing the property. The risk is greater than the reward on this one when a persons financial future is on the line. I would always highly recommend against this as an option in a Short Sale as well as most other transactions.
Comment by Neddie B. on May 22, 2011 at 6:37am
I would recommend against it, if the deal falls through and they don't want to leave you now have to evict.  Not a good situation.
Comment by Sue Irwin on May 22, 2011 at 6:09am
You could also end up with buyers' remorse prior to escrow even opening, thus losing the buyer rather than locking them in. There would need to be special disclosures tied to the lease for both buyer and seller about what could happen or not happen with the tenancy under a short sale situation. I would recommend a real estate attorney to both parties. Also I love the idea of having a property manager do the lease, reducing listing/selling agents' liability to some degree if something went wrong. I would actually like to hear what an attorney has to say about this.
Comment by Wendy Rulnick on May 22, 2011 at 5:25am

Kathleen - It's really no different than selling a short sale that already has a tenant in it.  When I do take a leased short sale listing, I make sure the tenant is on a month-month lease or has agreed to move out with a 30-day notice if we go under contract.  It's the same thing with a buyer becoming "that" tenant.  All the standard lease precautions should be taken. Thank you for all the comments and discussion, everyone.

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