A use and occupancy agreement can allow a seller to remain in the home for a certain amount of time after closing (also known as a “rent-back” arrangement). —-
You got an offer for your house, in the amount you were hoping for — but there’s a slight problem: You haven’t found your next residence just yet. As excited as you are about the prospect of a successful sale, you’re hesitant to sign a contract without knowing you’ll have somewhere to go. What are your options, other than letting a serious buyer slip away?
Enter the use and occupancy agreement. Often referred to as the “U&O,” this is a fairly common agreement between a buyer and seller, where one of them is permitted to occupy the property for a specified period of time.
In some cases, the buyer is the one who requests the U&O, so they can move into the home while still waiting for a mortgage to be finalized and before ownership is legally transferred.
On the flip side, 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). In markets where inventory is limited, like what we’ve seen in the wake of the COVID-19 pandemic, sellers are more likely to request U&O agreements because it’s tougher to find their next property.
Marc Lagrois, a top Michigan real estate agent, says occupancy after closing is a very common occurrence. “It doesn’t diminish the allure of property, as long as it’s a reasonable timeframe,” he says.
How does a U&O differ from a lease?
While a use and occupancy agreement might seem a lot like a lease, there are some fundamental differences.
With a lease, the tenant has certain basic rights, such as the right to not have their privacy infringed upon, and to not be charged a deposit above a certain amount, among others. With a U&O, the seller inhabiting the home is not contractually granted those standard rights.
Lagrois compares the U&O to an Airbnb rental, in that there is no formal tenant/landlord relationship. “It’s just a very limited contract that grants the seller the ability to remain for a fixed period at a fixed rate,” he explains.
According to David Reischer, real estate attorney and CEO of LegalAdvice.com, a U&O also makes it easier to evict and remove a person from a property if something goes wrong as compared to a lease. “A U&O should always specify that the agreement creates a mere license to occupy the premises, and is not a tenancy,” he says.
Another key difference between a U&O and a lease is in their duration. “A U&O is only for a short period of time and is only out of necessity,” explains Shea Adair, a real estate investor in Raleigh, North Carolina. “A lease is purposeful, where someone wants to use and occupy a structure for a longer period of time and therefore needs to be in agreement with it.”
Terms of a U&O
Use and occupancy agreements typically consist of two main terms:
- Period of time: The agreement should include a very specific timeframe for occupancy. As a seller, Lagrois says it’s best to try to limit the duration to 30 days or less. If the seller wants to stay for much longer than that, it could end up affecting the marketability of the property.
- Amount of payment: The U&O should also specify how much the occupying party will pay to remain in the home. Lagrois explains this is usually a daily rate that covers principal, interest, taxes and insurance. In some cases where there is a strong seller’s market, he has seen some buyers agree to grant occupancy at a reduced rate, or even for no cost at all, in order to make their offer more attractive and competitive.
When does a U&O come in handy?
In most cases, a use and occupancy agreement is created to address one of the following common scenarios:
- The seller needs more time to purchase their next house. This often occurs when the seller has listed their current house before purchasing the next one. In many cases, the seller needs the equity from the sale to fund the down payment on another house, or perhaps housing inventory is limited and they simply haven’t found the right property yet.
- The seller has found a house, but that closing has been delayed. In this case, 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. This sometimes happens if the closing has been delayed, and the buyer has already sold and vacated their previous house. In that case, the buyer may request to move in before closing.
- The buyer wants to lock in a favorable mortgage interest rate. If it’s financially in the buyer’s favor to close quickly but the seller isn’t quite prepared to move out yet, the seller might agree to an earlier closing if the buyer allows them to continue living in the house for days or weeks after ownership is transferred.
- The homeowners are selling their home to one of their children, but plan to continue living there. This often happens if aging parents want to transfer ownership of their home to a child’s name, but still want to use it as their residence.
U&O tips for sellers
- Keep it to a reasonable timeframe. Lagrois points out that if the U&O time frame is too long — particularly in the summer, when families with children are trying to time a move before the back-to-school season — that can diminish a home’s marketability. He recommends trying to stick to a maximum of 30 days, especially if there is an inventory surge that puts the market more in the buyer’s favor.
- Maintain homeowner’s insurance. If you, as the seller, are staying in the property after closing, it’s important to maintain your homeowners insurance while you’re living there, even if ownership has already been transferred to the buyer. “This policy protects not just the house, but also all of the belongings inside,” explains Lagrois.
- Be clear and up-front about the U&O. Ideally, the requirement for the seller to remain in the home for a certain period of time should be disclosed in the listing itself, so the buyer would be fully aware of the circumstances and there would be no unwelcome surprises.
- Put it in writing. This might seem like an obvious point, but one that is worth stating. The written contract should be provided to the buyer, seller, and all involved agents to ensure that everyone agrees with the terms.
- Be specific. Ambiguity has no place in a U&O. “Typically, a use and occupancy agreement spells out the details in very concrete terms and addresses all the possible contingencies and various scenarios that may occur,” says Reischer. “The agreement should spell out any penalties and payment of attorney fees if a party does not abide by the terms of the contract.”
Alternatives to a U&O
If you don’t want to mess with drafting a U&O or carrying the risk that comes with living in a home after ownership has already been transferred to the buyer, another option is to go through an online platform, such as HomeLight’s Simple Sale network, to get a cash offer from a non-traditional buyer.
Because a cash buyer or investor isn’t looking to live in your property full-time, they may be able to offer more flexibility to pick your move-in date or avoid some of the pressures of buying and selling at the same time. Feel free to request a Simple Sale offer at your leisure — you’ll be under no obligation to accept it, but it’s always good to know your options.
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