Real estate transactions can be complicated, especially when financing is involved. Sometimes things just don’t come together enough to get you to closing on time. These situations are where a use and occupancy agreement can help. Find out how you can use one to keep your transaction together in a pinch.
The use and occupancy agreement — often referred to as the “U&O,” — is an agreement between a buyer and seller, where one of them is permitted to occupy the property for a set period. It’s usually put in place if the buyer needs to move into the property before ownership can be transferred.
However, the U&O can allow the seller to remain in the home for a certain amount of time after closing (also known as a “rent-back” agreement). It’s used this way in markets where inventory is low because it’s tougher for the seller to find their next property.
However, this agreement is not the same as a lease. Essentially, the buyer/seller isn’t considered a tenant, so they won’t be granted any tenant’s rights. The agreement only allows them the right to use the property.
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 former home, to use their new property before they officially take ownership. This could mean they rent the property from the seller for a few days, or simply move in their belongings.
Sometimes the buyer wants to close quickly to lock in a good mortgage interest rate, but the seller isn’t ready to move out. The seller could agree to an earlier closing if the buyer allows them to continue living in the house for a time after ownership is transferred.
Less frequently, it’s similar to a rent-back contingency. The seller would rent the property from the buyer after settlement, just in case their own new home settlement gets delayed.
Occasionally, the homeowners are selling their home to their child, but intend to keep living there. This happens if older parents want to transfer ownership of their home to a child’s name, but still want it as their residence.
Agents Compete, You Win.There are some fundamental differences between a U&O and a lease. The tenant has certain basic rights with a lease. A lease provides the right to not have their privacy infringed upon, and to not be charged a deposit above a certain amount.
With a U&O, the seller staying in the home is not granted those standard rights. There is no formal tenant/landlord relationship. It’s a very limited contract that grants the seller the ability to remain for a fixed period at a fixed rate.
A U&O also makes it easier to evict and remove a person from a property if something goes wrong. A U&O should always specify that the agreement merely creates a license to occupy the premises, and is not a tenancy.
Another key difference between a U&O and a lease is in their duration. A U&O is for a short period of time and only out of necessity.
The agreement should include a very specific timeframe for occupancy. As a seller, it’s best to try to limit the duration to 30 days or less.
The U&O should be specific on how much the occupying party will pay. A daily rate that covers principal, interest, taxes and insurance is usual. Some buyers agree to grant occupancy at a reduced rate, or no cost, to make their offer more attractive in a strong seller’s market.
The U&O should describe the penalty if the homebuyer or seller does not vacate the property by the termination date.
A use and occupancy agreement limits usage. This provision keeps the home buyer from causing any undue waste, or making any structural alterations. It also prohibits changes to the property, such as painting, installing flooring, or changing fixtures.
A use and occupancy agreement is a legal document. It should be prepared by a real estate agent and real estate attorney. This ensures both sides are treated fairly and provides oversight.
Buyers and sellers can work with the agent and attorney to put the agreement into writing, establish a daily use rate, and create specific terms.
Buyers and sellers will both want to do a walkthrough of the property to document the condition of the home and relieve themselves of liability. That way, the transfer of ownership — and financial responsibility for the property — stay straightforward.
A written contract should be provided to the buyer, seller, and all involved agents to ensure that everyone agrees with the terms
If the buyer’s U&O time frame is too long, it can lessen your home’s marketability. Stick to a maximum of 30 days, especially if more homes come on the market. More inventory puts the market more in the buyer’s favor.
As the seller, it’s up to you to choose how you want to be compensated for the use of your property. However, choosing a daily rate over one flat-fee could have an advantage. You’ll know how much you’re owed if the agreement needs to be extended.
If you, the seller, are staying in the property after closing, it’s important to keep your homeowners insurance while you’re living there. That’s even if ownership has already been transferred to the buyer. This policy protects not just the house, but also all the belongings inside.
Agents Compete, You Win.If you, the seller, need to remain in the home for a certain period, it should be disclosed in the listing. That way the buyer is fully aware of the circumstances and there are no unwelcome surprises.
A use and occupancy agreement spells out the details in very concrete terms, and addresses all the possible contingencies and scenarios. The agreement should also spell out any penalties and payment of attorney fees, if a party does not abide by the contract terms.
If you think you might need a use and occupancy agreement, UpNest, which is owned by parent company Realtor.com, can help you find an area Realtor with U&O experience who can contact an attorney to draw up the agreement.
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Agents Compete, You Win. How does a use and occupancy work?If a seller has a closing delayed, the seller may request to continue living in their current home until they are able to close on their new house and take occupancy. The buyer needs to move in prior to closing.
Is occupancy the same as rent?Not quite. A tenant signs a lease contract with you. An occupant resides in the tenant’s leased space with your permission. These could be family members, a friend, or their significant other. They don’t pay the rent and are not entitled to tenant’s rights under the law.
