Occupancy Agreements and Seller Carry

  1. Why is it so risky for Sellers to allow a buyer to rent the subject property prior to closing?
  2. What are the general risks for listing brokers when sellers carry financing in residential transactions?

QUESTION #1

Why is it so risky for Sellers to allow a buyer to rent the subject property prior to closing?

 Until the transaction closes, the seller cannot know that the buyer will close. The Real Estate Commission approved buy/sell contract contains four (4) preprinted contingencies regarding financing, appraisal, property condition and the condition of the title. Many contracts also contain additional contingencies excusing the buyer’s performance, including but not limited to a contingency for the sale of the purchaser’s existing home. Even if the buyer waives and/or satisfies all of the contingencies, the buyer may still not be able to close.

If the buyer does not close after satisfying or waiving all of the buyer’s contingencies, then the buyer’s failure to close will be a breach under the contract (unless the breach is caused by a default by the seller or the failure of a contingency for the benefit of the seller). However, the seller will be fighting the phenomenon that “possession is nine-tenths of the law.” The buyer may not have made alternative living arrangements. Sellers should be informed that regardless of what is stated in the lease, the seller may need to evict their buyer.

If, after being discouraged to permit pre-closing occupancy, the seller is still willing to allow the buyer to take possession of the property prior to closing, then broker should advise the buyer to work with an attorney, or the broker should work with an attorney to structure the lease.

QUESTION #2

What are the general risks for listing brokers when sellers carry financing in residential transactions?

Sellers rarely carry financing because they want to become lenders. Sometimes sellers carry financing to defer taxes. However, sellers typically carry financing because the property does not initially sell for the price sought by the owner. Rather than lowering the price, the seller is psychologically committed to a price above what the market is telling the seller the property is worth. What type of buyer would pay above market value? A buyer with credit blemishes who can only purchase a property through seller carry financing. Sellers often receive no proceeds from these sales. Often, only the Broker is paid out of the closing. The Seller resents this when the Buyer defaults. Buyers who have a continuing post-closing relationship with a seller (i.e. the obligation to make payments) are more likely to complain about property condition.

A version of this article appeared in the Colorado REALTOR® News, the monthly publication of the Colorado Association of REALTORS®.

Jon Goodman is a shareholder with Frascona, Joiner, Goodman and Greenstein, P.C., a Colorado law firm. His practice areas include Real Estate,Brokerage Law, Contracts, Land Use, Leasing, Real Estate Title, Association Law, Business Law, and Finance. Contact Jon Goodman.

Disclaimer — Content is general information only. Information is not provided as advice for a specific matter, nor does its publication create an attorney-client relationship. Laws vary from one state to another. For legal advice on a specific matter, consult an attorney.

JONATHAN A. GOODMAN