Real estate transactions are comprised of many moving parts. Sometimes, especially when financing is involved, those parts don't come together well enough to get to the settlement table on time. Situations like those are where a use and occupancy agreement can help. Read on below to learn more about what a use and occupancy agreement is, how it works, and how you can use one to keep your transaction together in a pinch.
What is a Use & Occupancy Agreement?
A use and occupancy agreement - sometimes referred to as a U&O - is a temporary agreement between the buyer and the seller that allows one party the right to use and occupy the property for a set period of time. It's usually put in place if the buyer needs to move into the property before ownership can be transferred.
One important thing to understand is that this agreement is not the same as a lease. While it's best to have a lawyer or real estate agent explain to you the differences between the two, it essentially boils down to the fact that the buyers aren't considered tenants. As such, they won't be granted any tenant's rights. The agreement solely allows them the right to use the property.
When a U&O might come in handy
Traditionally, a U&O agreement comes into play whenever an original settlement date is changed or otherwise delayed. Most often this agreement allows the buyers, who may have already given up their prior property, to use their new home before they officially take ownership. This could mean that they rent the property from the seller for a few days or simply that they move their belongings in beforehand.
Less frequently, it's used similarly to a rent-back contingency. In this case, you would rent the property from the buyers after settlement has occurred in the event that settlement on your new home gets delayed.
How to create a U&O that works
Put it in writing
This is the most important tip of all. If you're thinking of using this type of agreement during the course of your transaction, put it in writing. Not only that, but make sure you have a pro - meaning either your lawyer or your real estate agent draw up the paperwork. While a few days may not seem like they'd make that big of a difference, you don't want to leave anything to chance.
Set a daily rate
Think of this like rent or a hotel bill. As the seller, it's up to you to choose how you would like to be fairly compensated for the use of your property. However, choosing a daily rate over one flat-fee could have an advantage. In the event that the agreement needs to be extended for a few days, you'll know how much you're owed.
In this case, while you're drawing up the agreement, the more specific you can be, the better. You want to make sure to set a clear length for the agreement, as well as explicit terms on what should happen when it expires. In addition, if you have any specific guidelines that you'd like the buyers to follow, such as not bringing in handymen during this time period or refraining from making any major changes to the property, be sure to spell those out in the agreement.
Do the final walk-through beforehand
Usually, the final walk-through takes place right before settlement so that the buyer can see the condition of the property before they move in. However, when move-in takes place before settlement, the waters can get a little murky. What if, for example, the stove breaks during the period of the U&O? Who's responsible at that point?
That's why it's best to have the final walk-through done and signed off on before the buyers take procession of the property, even if it's under temporary circumstances. That way, the transfer of ownership - and financial responsibility for the property - stay straightforward.