Although the recent home-buying frenzy in metro Phoenix (particularly here in the East Valley) has begun to slow recently, we continue to see extremely low inventories with buyers competing for properties. Listings are typically selling quickly, so sellers may need extra time to close escrow on their new home. That’s where a post-possession occupancy agreement comes in.

Buyers may choose to offer post-possession to the seller to make their offer more competitive and win a bidding war. As this practice becomes more common, it’s important to understand how these agreements work, and what the risks are.

What is a Post-Possession Occupancy Agreement?

A post-possession occupancy agreement, or leaseback, is when the buyer agrees to allow the seller to continue to occupy the home for a certain period after closing. Historically, these agreements have been used to allow the seller to stay in the home for a short period of time such as a few days or possibly a week. However, in the current market these agreements are stretching to multiple weeks or even months. 

Basically, the post-possession occupancy agreement turns buyers into landlords and sellers into tenants. Here are some things to keep in mind before entering into such an agreement.

Have a Written Agreement

The buyer & seller should mutually agree on the terms. The agreement must be signed by all parties prior to closing. It should clearly spell out all the terms of the agreement including:

  • The length of time the seller can continue to occupy the home
  • If rent will be charged & what the amount will be
  • Who pays for utilities
  • The buyer’s right to access the property
  • The seller’s responsibility to maintain the home 

Insurance Coverage

The buyer will need to have homeowner’s insurance coverage on the home. This will cover such things as storm roof damage or damage from a leaking water heater, etc. The seller will also need a renter’s insurance policy to cover their personal possessions.

Charging a Deposit

The buyer may want to charge a refundable security deposit to cover any damage done to the home while the seller occupies it after closing. This achieves two things. It is an incentive for the seller to properly maintain the home. It lets the seller know that they’ll be responsible for any damages.

Get the Lender’s Approval

The buyer should check with their lender before agreeing to let the seller have a leaseback. Most lenders won’t allow a leaseback period longer than 60 days. An agreement over 60 days could change the classification of the home to an investment property rather than owner occupied, which could affect the buyer’s interest rate.

Know the Risks

The greatest risk of a post-possession agreement is the possibility of the seller refusing to leave at the end of the leaseback term. The leaseback agreement should clearly state what remedies the buyer has if the seller fails to vacate the premises as agreed.

Our View

All in all, a well written post-possession agreement can work and be a benefit to buyers & sellers if the parties are reasonable and act in good faith. However buyers and sellers should consult with their insurance, legal, tax and accounting professionals before signing a post-possession agreement.

Contact The Donnelly Group!

Thinking of buying or selling a home in the East Valley or anywhere in metro Phoenix? Contact the Donnelly Group today at 480-792-9700 or by email. Our team will help you make the best decisions to get the best deal done in what is still a very competitive sellers market.