Post settlement occupancy agreements: A useful tool, but beware of potential pitfalls

A post settlement occupancy agreement allows a seller to continue to live in his home after settlement, under an arrangement where the seller is essentially renting the home back from the new purchaser.

This type of arrangement can be a life-saver for a seller who is purchasing another home but won’t be able to close on that purchase until a few days or weeks after he sells his current home. Joe wrote a very informative blog post about post settlement occupancy agreements and how they can be a solution to settlement timing issues. 

I thought I would take a look at things from a different perspective and point out some potential pitfalls of such arrangements. In order to be protected, both purchasers and sellers need to prepare for the worst.

What do I mean by the worst? Imagine a case where a seller who is renting back catches the house on fire, and the house burns down to the ground. There are a lot of tricky issues in such a situation.

One thing we know for sure is that the purchaser now has no home to move into, which is obviously a problem, no matter how the liability issues get resolved.

In the normal case of a house fire, there is a homeowner’s insurance policy that would provide coverage. Here, presumably the purchaser obtained a homeowner’s policy with an effective date of the date of the settlement.

The GCAAR standard post settlement occupancy form states: "From the date of settlement the Buyer shall obtain and maintain insurance on the Property with the Buyer’s policy being primary in the event of other available insurance." (Form #1309, paragraph 6.)

The trouble is that despite this provision, the purchaser’s insurance company might have a different opinion.

For example, it is possible that the purchaser’s insurance would not cover the fire, under an exclusion based on the fact that the policy holder was not living in the property at the time of the fire?

Even if the purchaser thought ahead and got coverage for someone renting property, the typical post settlement occupancy agreement will say that the arrangement is not a landlord/tenant relationship, which might cause complications for insurance coverage.
For example, the GCAAR form states, "Nothing in this Agreement shall constitute a Landlord/Tenant relationship between Buyer and Seller." (Form #1309, paragraph 8.)

It also may be that the seller continued his/her homeowner’s policy through the rent-back period, but it is possible that this insurance would not cover the fire damage, due to the fact that the seller no longer owned the home at the time of the fire. The seller may have also gotten renter’s insurance for the rent-back period (the GCAAR form requires it), but typically that will cover only belongings, not damage to the house itself.

Even something less extreme than a whole house burning down can pose some tricky questions in a post settlement occupancy situation.

The buyer now owns the house, along with the appliances, HVAC, etc. If the seller negligently breaks the door off of the refrigerator during the rent-back period, one would think that the seller should be held responsible, and, normally, that would be the case, at least under the GCAAR standard form, which provides for a deposit by the seller to be applied to any damages to the property caused by the seller in excess of ordinary wear and tear. (Form #1309, paragraph 2.)

But what if the refrigerator simply stops working 2 weeks after the closing, during the rent-back period? Whose responsibility would that be?

Since the refrigerator is now the buyer’s, generally one might think the buyer would be responsible, but paragraph 3 of the GCAAR form provides that the seller is to deliver the property (i.e., deliver it at the end of the rent-back period) in the condition specified in the sales contract. The sales contract provides that the condition of the property at delivery is to be in substantially the same condition as of the date of the contract, the home inspection or some other date to be specified. If the refrigerator was working at the specified date, then the seller is responsible if it is not working at the end of the rent-back.

The bottom line is that both buyers and sellers should carefully review any post settlement occupancy agreement to see what the agreement provides concerning liability for issues that arise during the rent-back period and concerning the responsibility for obtaining insurance.

They then should make any revisions to that agreement that are necessary to protect their interests, in consultation with an attorney, if possible. They should also contact their insurance agent to discuss insurance coverage for the rent-back period.

One other thing that a buyer should do before agreeing to allow the seller to rent back after closing is to check with his lender to see whether the lender will permit it.
Typically lenders will allow a short rent back. For anything longer, the buyer could be in violation of the covenant in the loan documents that states that the property will be owner-occupied.

If the seller is paying a security deposit and/or "rent" at closing, these numbers will appear on the closing statement, which the lender needs to review and sign off on.

You don’t want the lender learning about the rent-back for the first time when they receive the draft closing statement from the title company and see those numbers.

New govt regulations take effect, drive up closing costs

Homebuyers in 2014 will no doubt experience a higher range of closing costs than those homebuyers coming before them. With the start of this new year, both mortgage lenders and title companies are now subject to several new regulations spawned by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. 

For example, as administered through the newly formed Consumer Protection Financial Bureau (CFPB), new disclosure forms will be required of mortgage lenders and title companies by August of 2015, including, but not limited to, the Loan Estimate (replacing the current Good Faith Estimate) and the Closing Disclosure (replacing the current HUD-1 Settlement Statement).

The requirement of these new disclosure forms effectively voids all current closing software production systems and demands a complete overhaul of those software systems. Re-tooling these software systems will be just one expense that will be passed along to the consumer. 

Another closing cost increase will be shifted to consumers with the forced adoption of Best Practices policies by title companies. Because the new law imposes liability on mortgage lenders for the acts of third-party vendors, including title companies, the mortgage industry has forced the hand of the title industry to adopt a uniform Best Practices policy. 

That means every title company, small or large – local or national – must implement and administer its own Best Practices policy and remain subject to yet another time-consuming annual audit. It also means that title companies (large or small) will likely have to expand their payroll to accommodate a chief compliance officer or an equivalent thereof. 

Whether or not the consumer is better protected remains to be seen but, for now, we do know that the costs of all these changes will be reflected on the new Closing Disclosure in the form of increased closing costs.

Meet our new compliance officer protecting homebuyers and home sellers

Moving into the year 2014 and beyond, "Compliance" is the word at Federal Title as our industry undergoes a major facelift in the wake of the Dodd-Frank regulatory outgrowth.

We are very proud to announce the addition of Dianne Pickersgill, Esq. to fulfill our newly created position of Chief Compliance Officer.

Dianne received her Juris Doctorate from Harvard Law School and prior to joining Federal Title represented clients in the areas of affordable housing and HUD multifamily regulatory compliance issues.

Dianne will oversee all of our regulatory compliance issues, including implementation and monitoring of our Best Practices policies.

She will essentially act as an internal auditor to assure, among many other things, the protection of our clients’ non-public personal information, the protection of our clients’ funds, and to make sure every Federal Title employee keeps a clean desk and complies with our Best Practices policy.

If you should have any questions about our policies for the protection of non-public personal information or how we best protect our clients’ funds, please don’t hesitate to contact Dianne directly.

The importance of choosing a title company

Choosing a title company is often an afterthought. And that’s understandable, since in the home buying process, decisions will have to be made in regards to a real estate agent, a lender, a home inspector, a moving company, a termite company, a home insurance company, and on and on.

However, the selection of a title company can be a critical step in the process as well, and not just because of the pricing.

Post closing issues arise with surprising frequency. Perhaps a tax bill has been overpaid and now the buyer needs a refund from the city or county tax office. Or maybe there is a tax classification issue. Only a local title company with experience can navigate you through these types of post closing issues.

Here is another scenario that occurs all too often: a property owner contacts us for a refinance or to sell the property and the title work reveals an unreleased trust, meaning that even though the prior loan was paid off, the lien was not properly released from the Land Records.

Obviously, this was the responsibility of the prior title company that handled either the prior refinance or the purchase of the property, so the ideal and quickest solution is to go back to that prior title company.
But what if that prior title company is no longer around or was a national title vendor? Good luck finding the paper trail, especially if that loan was paid off a long time ago.

Of course you could go directly to the lender, but with all of the takeovers and changes among lenders, they often have difficulty finding old information. If you had used a respected, local title company, you would have a local contact that would personally research and resolve the issue for you.

So keep in mind the reputation and the experience (as well as the price) of the title company that you select.

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Our blog contains general information only, not intended to be relied upon as, nor a substitute for, specific professional advice. Rate tables and figures that appear on our blog are deemed reliable but not guaranteed. For current rates & policies, refer to our Quick Quote and Consumer Guide. We accept no responsibility for loss occasioned to any purpose acting on or refraining from action as a result of any material on our blog.