real estate

Holdover rental has risks for homebuyer

Steve McLindenDear Real Estate Adviser,
Sellers often ask to stay in the home for a short time after closing and I have seen your advice regarding this. But what if the seller wants to stay and rent for six months?
-- Esther

Dear Esther,
In real estate parlance, this is known as a "holdover" or "post-closing possession," though buyers burned by these arrangements might have a more derogatory term for them. These deals, however, are a fact of life in the constant struggle for buyers to coordinate their move-outs with their move-ins.

In most cases, a holdover is a no-risk proposition for the seller and a multirisk one for the buyer. Though the chances of something going badly askew in a possession of a few days or even weeks are small, the odds of something bad happening increase enormously as the months -- or half a year in your case -- go by, especially without ironclad protections built into the contract.

First off, determine if you're even allowed to make this concession. Check with your prospective home insurer to see what kind of coverage for fires or other catastrophic losses you have when you're not the occupant of your home. You might need to buy something akin to renters insurance. Same goes for the lender. Would such an arrangement violate terms of your mortgage? These institutions might be a little flexible on these arrangements, but a half-year could be a tough sell.

If you do sort all that out and agree to oblige the seller, presumably to grease the deal, you need to structure the holdover in the form of a license rather than a lease. Unlike a lease, where the process for evicting a resident can be time-consuming and costly, a license may be quickly revoked by you for any number of reasons set forth in your contract. Such occupiers, in other words, typically aren't covered by the community's renter rights.

To further deter the seller from lingering in your home past the agreed-to date, establish a daily fine that greatly exceeds the cost of what the possessor might spend at a nice hotel. A penalty of $400 or $500 per day says "get out" as emphatically as Arnold Schwarzenegger's cyborg Terminator character. More importantly, ask for an escrow of 2 percent to 3 percent of the purchase price to serve as a damage deposit in the event your seller departs with appliances that were supposed to remain, sullies or scars the place, or reveals damage previously obscured by furnishings. In a conventional deal, a buyer's final preclosing walk-through would protect you from most of these things, but not in a post-closing possession.

The seller's monthly rent or fee should also include a proportionate share of mortgage interest, real estate taxes, insurance, utilities or other ongoing charges. These and other contract addendums can be drawn up by an experienced and conscientious real estate agent, though a qualified attorney is always preferable.

Ultimately, such attorneys might tell you that you're better off delaying the closing rather than allowing a seller-dweller to linger in the house, though yes, that's not always possible.

Good luck! Protect yourself, please.

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