Possession Before Close Questions

[Jay Chekansky]

Hey BP,

I'm hoping to learn a few lessons from a what happened to one of my house flips recently.

I finished off a house flip (the work) back in early February.  The house was under contract the first week of Feb. The buyers came "pre-qualified" (term used loosely to say the least), the house appraised above the contract price.

The buyers were going to use an FHA loan - as it turns out, they didn't have the money for the 3% down payment or closing costs. I offered to cover 1/2 of the closing costs to help speed thing along. The entire time, my realtor is telling me closing will be next week, then next week, then end of March, etc. I'm asked if I'd do a favor and allow the buyers to move into the house since their existing rental lease was up at the end of March. So I sign a possession before close lease agreement with a 14 day time frame. Then I find out that the buyers had to have one of their parents refinance his primary residence to provide them with down payment money. When that finally goes through, the underwriter finds that one of the buyers is lacking the credit worthiness to be on title/mortgage. Now, one of the buyers fathers is going to have to be on the loan.

In the mean time, I finally got a more thorough lease agreement in place and have collected a few months of rent.

I'm hoping to never go down this path again with what turn out to be unqualified buyers. 

Moving forward, what do you guys and gals suggest to avoid this scenario?

Should I have asked for increases to escrow money along the way?

Thanks,

Jay

[Ashley Schroeder]

I would just stick to not allowing anyone to take into possession the property until the deal closes.  We had issues with loans falling through as well as personally having to wait to enter our new residence until closing (how fun to essentially own two homes yet be homeless with kids!).  A common theme I see in a lot of other threads is to not make someone else's problems your own problems.  I'm glad you put a lease in place; and that may be an option for any future problems, turning it more into a rent to own situation if needed, so that you are still trying to help someone else out.  But you also need to look out for your assets as well.  What if they moved in and were never able to be approved?  Would you be okay with renting indefinitely?  Property value going down because they damage the residence?  Just things to think about.  Good luck in whatever you decide.  I think it could be beneficial either way if they still want the property and are willing to rent it instead; especially with all of the problems they are having with trying to get a mortgage.