So, you’ve finally found your dream home, your offer has been accepted, and the closing day is fast approaching. Everything seems to be falling into place until a sudden change in your timeline requires you to move in before the sale is finalized. But wait – is it possible to live in the home before closing?
The answer is yes, thanks to a use and occupancy agreement (U&O).
A use and occupancy agreement is a temporary arrangement that allows the buyer to reside in the home before the closing is officially completed. It does not transfer ownership or tenancy rights but simply provides early access while the final details are being sorted out, serving as a legal bridge between the contract and closing.
This article, brought to you by Redfin, covers all the essential information you need to know about use and occupancy agreements.
Key takeaways
- A Use and Occupancy (U&O) agreement allows a buyer to temporarily reside in a home before the sale is officially closed, similar to a short-term rental.
- A U&O is commonly needed when buyers encounter lease timing issues, job relocations, or delays in closing due to financing or paperwork.
- Offers helpful flexibility—but both parties (buyer and seller) require a clear, written agreement and legal guidance to avoid complications.
What is a use and occupancy agreement (U&O)?
In simple terms, a use and occupancy agreement (U&O) is a temporary arrangement that allows you to move into a home before the sale is officially closed. It functions like a short-term rental agreement between you and the seller, granting you permission to use or reside in the home for a limited period even before you legally own it.
While a U&O provides access, it does not transfer ownership or full tenant rights. Instead, it clearly outlines the terms of your stay, including the move-in date, duration, responsibilities (such as utilities and maintenance), and any payments due during the occupancy.
Why would a buyer need one?
There are instances where life events do not align with the closing day, making a U&O agreement essential. It permits a buyer to move in before the scheduled closing, whether due to an earlier lease termination, work relocation, or other personal circumstances.
Beyond personal reasons, a U&O is beneficial when closing is delayed by financing, paperwork, or scheduling issues, but the buyer still requires access to the home. In such situations, the agreement ensures that the buyer can legally occupy the home while safeguarding the rights of both parties.
Benefits and risks of a U&O agreement
A use and occupancy agreement can be a lifesaver in certain home sales, but like any arrangement, it comes with advantages and disadvantages.
Benefits for buyers
One of the significant advantages is avoiding multiple moves and ensuring a smoother transition after closing. At times, a U&O agreement can even prevent temporary homelessness if the buyer has nowhere else to go during the gap between closing and moving in.
Benefits for sellers
For sellers, especially if the home is already vacant, it can be a beneficial financial boost. They may receive use and occupancy payments from the buyer for the time spent in the home after closing, which can assist while they plan their next steps.
Risks to keep in mind with a U&O agreement
While a U&O can be incredibly helpful, there are several risks to be cautious of:
- The sale could fall through, leading to the need to move out after settling in.
- Damage disputes can arise if there is no walkthrough to document the home’s condition.
- Insurance coverage may be unclear in case of issues during the occupancy period.
- Legal liability can become complex without adequate protections in place.
- Some lenders may not approve of early occupancy, potentially delaying the closing.
The positive news is that most of these risks can be mitigated with a well-crafted agreement and some legal guidance. It’s all about ensuring fairness and protection for both parties.
What terms are in a U&O agreement?
Although the specifics may vary, most use and occupancy agreements cover five essential elements:
- Occupancy fee: This is the amount the buyer pays the seller daily to cover expenses like the mortgage, taxes, and insurance while residing in the home before closing. It typically equates to around 1% of the purchase price per month, calculated on a daily basis. The actual fee may vary based on mutual agreement and local norms.
- Duration: Specifies the precise dates the buyer is permitted to live in the home before closing. This clarity ensures everyone knows the duration of early occupancy.
- Responsibilities: Outlines who is responsible for utilities, routine maintenance, and any repairs during this period. Generally, the buyer handles utilities, but this can be negotiated.
- Insurance: Clarifies the party responsible for maintaining homeowners or renters insurance during the occupancy period, offering protection in case of incidents.
- Hold harmless clause: Safeguards the seller from liability in case of injury or damage caused by the buyer or others during early occupancy.
Do you need to put down a security deposit?
Yes, similar to renting, you may be required to provide a security deposit when entering into a use and occupancy agreement. This deposit serves to protect the seller in case of damage or unpaid fees during your early occupancy. The deposit amount and refund terms should be clearly defined to avoid misunderstandings.
Documenting the home’s condition before early occupancy
While a security deposit safeguards the seller, it is equally crucial for you as the buyer to protect yourself. This is where a pre-occupancy walkthrough becomes essential.
Before moving in, conduct a thorough walkthrough of the home with the seller to note any existing damage or issues. This simple step can prevent misunderstandings and is a vital aspect of the due diligence process.
>> Read: What is Due Diligence in Real Estate?
When and how a U&O agreement can be terminated
In some cases, things may not proceed as smoothly as anticipated. The use and occupancy agreement clearly outlines the process for either you or the seller to terminate the early move-in arrangement if necessary.
For instance, if you fail to make an occupancy fee payment or cause damage to the property, the seller may request you to vacate before the closing. Conversely, if the seller wishes to cancel, they must adhere to the agreement’s specified procedures.
Is a use and occupancy agreement right for you?
A use and occupancy agreement can be a valuable solution when you need to move into your new home before the closing. It offers the flexibility to settle in without waiting for all the paperwork to be finalized. However, it is essential to be aware of the associated risks. Living in the home before officially owning it requires clear rules and understanding between you and the seller to prevent misunderstandings or legal complications later on.