Post possession occupancy is increasingly common - How can a buyer protect themselves?

Homeowners are almost always faced with a dilemma when coordinating the timing of their sale with their new purchase. If they are able to close on their new purchase first, they can then take some time to move into their new home before they close on their sale. However, most buyers will need the money from their sale to close on their new purchase. Also, the new lender may require proof they have received the funds from their sale. The lender may also require proof that the mortgage from their old home has been paid off.

Buyers used to be able to schedule their transactions on the same day, the sale in the morning and the purchase in the afternoon. Funds could have been wired into their or their attorney's bank account and been available for the afternoon purchase. Many lender's used to accept the HUD-1 Settlement Statement from the sale as an "at closing condition" of the purchase mortgage approval. However, times have changed and mortgage guidelines are much tighter. Very few lenders accept the HUD at closing anymore making the same day closing increasingly rare.

Accordingly, more and more sellers are asking buyers to remain in the home after the closing. This is typically done through an agreement prepared by the parties' respective attorneys containing provisions regarding the duration and payment to the purchaser. Nonetheless, virtually all of the risk is assumed by the buyer. So why would they agree? As of this writing, New York City remains a seller's market. Allowing the seller to stay for a period of time after the closing may be the only way to get the offer accepted. Fortunately, a buyer can protect themselves with a well drafted post-possession agreement by an experienced attorney.

  1. Do not create a landlord tenant relationship. The agreement is called a "Post Possession Agreement." The terms "lease," "landlord" or "tenant" should not appear anywhere in the agreement. Rather, the seller should be termed a licensee. If the seller refuses to leave, you want to make it as easy as possible to legally remove them from the apartment. Evicting a "tenant" in New York City can take many months (even years) and cost thousands of dollars in legal fees.
  2. Demand a substantial penalty for a late departure. You want to motivate the seller to leave as agreed. For example, you may charge the seller $5000 to remain for a month which increases to $1000 per day if they remain longer than a month. The penalty should be of an amount where it makes no financial sense for the seller to remain.
  3. Demand a substantial escrow This amount should cover the penalty discussed above for a reasonable period of time. It should cover possible damage to the property as well. As a buyer, you want the amount as high as possible. The seller should be motivated to leave and have their escrow returned.
  4. Insure that duration of the occupancy does not cause a problem with your mortgage approval. Lenders may require that the buyer occupy (or intend to occupy) the property within 30 days. If the post possession agreement is for 60 days, your mortgage application may get denied.
  5. Other items you may request:
    • Require a right to a walk through both before the closing and when the seller vacates before the escrow can be returned. Also, demand that the premises be delivered in "broom clean" condition.
    • Require that the seller maintain liability insurance and indemnify you for any lawsuits arising during their occupancy.

So, if you need to agree to a sellers post possession to make the deal work, make sure that you have a well drafted agreement by an experienced attorney.

Adam C. Wilner, Esq. is a partner at Greenberg & Wilner, LLP. Mr. Wilner is experienced in Real Estate transactions as well as Real Estate litigation. In litigation, Mr. Wilner experiences first hand what can go wrong in a typical transaction and he knows how to avoid these problems with his residential closing clients.