When should you consider a post-closing occupancy agreement? Let’s dig into the related ramifications and issues.
I was speaking with a borrower this morning during a routine call. She mentioned that she was frustrated because she was having issues buying properties with post-closing occupancy. “Post Closing Occupancy” means that the seller is not leaving and surrendering the property after closing.
For fix and flip and rental investors, they should not allow this to dampen the deal. You should consider the relevant issues and either account for delays or get a post-closing occupancy agreement added to the purchase contract.
Proper due diligence will prevent future issues. You should always ensure a contract contains adequate contractual language around post-closing occupancy. Furthermore, if the seller gives any inclination that they are planning to stay after closing, you may want to add additional clarity. You should include these terms as special provisions in the contract. These provisions are usually spelled out contractually under the “Additional Provisions” section.
Issues a Post Closing Occupancy Agreement Can Resolve
Whether someone remains in the property for two, ten, or sixty days, it can quickly become extremely costly. Every day that the property remains occupied costs you time that you could be working on it. If it is a rental, each day delays your ability to lease the property, which will cost you income and can affect your overall cash flow. If the property is a flip, you will not be able to sell.
On-time departure can hamper your overall success as an investor. Time is money, and it is your responsibility and best interest to manage that exposure and risk. The bottom line is, if the seller fails to leave, you may need to force them to leave the property through eviction. You do this through a court-ordered eviction, known in the courts as a FED or Forcible Entry and Detainer action. A FED will take a minimum of three weeks in Colorado. Between lost time and attorney fees, the whole process can become extremely costly.
When we sign a contract, we handle this by including a penalty for each day the seller fails to vacate the property. You should ensure these funds remain in escrow until after they have left the property. Don’t make it easy for anyone by providing a contractual penalty that is $200 to $500 per day. You want to make it hefty to dissuade
Post Closing Occupancy Agreement and Junk
Ok, so now you’ve covered issues with getting the people out of the house. So, what do you do about all of their junk? Notwithstanding best intentions, sometimes folks can’t get all their stuff out of the house due to any number of reasons.
To cover this, you should add a provision that says any personal property left behind by the seller can be labeled as abandoned after ten days. Once the ten days are up, you can then dispose of all of their junk.
You will probably need a roll-off to get it out of there! You might also want to include a provision to cover the cost of removing personal property, should it be abandoned. If this does happen, you should allow you to charge the escrow for the cost of disposing of all this stuff – labor to carry it, dumpsters to dump it, and time delays.
Post Closing Liability
You should also understand your exposure to liability and risk associated with any post-closing occupancy agreement. Sellers should be required contractually to maintain liability insurance coverage until after they vacate the property.
These types of agreements will typically require a deposit that the title company withholds from the seller’s funds. By doing this, you protect yourself in case the seller damages the property during the rent-back period. Once you do a final inspection walkthrough, assuming everything is acceptable, the buyer will notify the title company to release the seller’s funds. The title company will also reduce the deposit by the agreed-to amount to offset the damage or issue.
Hoarders and Pack Rats Should Not Scare You
Don’t be dismayed by hoarder or pack rat properties. Some of our investor’s best projects have required them to clean the property out. The images in this post are from a project we financed. This project turned a massive profit for our investor, to the tune of about $250,000. In this case, the prospective buyer did not believe the seller would get all the stuff out of the house. As it turned out, they didn’t. However, our savvy investor built the cleanout cost, which turned this project into a home run!
Being Flexible Can Win a Deal
The bottom line is, to win deals, you have to be flexible. We all know, any time you can gain an advantage over other bidders, or buyers for the property can, in turn, can help you secure a winning property for rehab or as a rental property. However, always consider this. If you do not act, and they have a free place to live, or if they fail to take all their stuff with them, your best efforts will probably not cover the losses you will suffer.