Tuesday, May 21, 2013

What Do "Closing Date" and Possession" Mean?

I found myself with a bit of extra time today and thought I'd get in some more defining of real estate terminology. Two that often cause confusion are "closing date" and "possession."

The Closing Date in a real estate sales transaction is the day that the sale is recorded.The seller gets the money and the buyer gets the deed, usually in a process called "escrow." I'll define "escrow" in a later post. Not all states have it, even though real estate transactions undergo a similar process.

A sales contract has to have a definite closing date. If the contract says, "closing to be determined by the parties," it's not a binding contract. That doesn't mean the date can't be changed. However, both buyer and seller must agree to the change. In my experience, closing date change addenda are common. The usual reason is that the lender didn't get documents to the closing company, or needed more documents from the buyer, seller or even broker.

But the date the purchase closes isn't necessarily the date the buyer takes possession of the home. Sometimes it is. But often, it is not. Why?

Maybe the closing date is a Friday, and the seller wants the following weekend to move out. In that case, while the closing date is Friday, the possession date would be the following Monday.

In my experience, it's customary for the seller to pay a daily rent of 1/30 of the monthly Principal, Interest, Taxes and Insurance (PITI) the buyer will be paying as a result of a new mortgage loan and the taxes and hazard insurance he or she now owes. In the instance above, the seller staying over the weekend would pay the buyer two days' rent.

Sometimes, a seller wants to remain in the property for a period of time, and sometimes, a buyer prefers not to take possession for whatever reason. Say she's stationed overseas and won't need the home for a month or so. In that case, the seller usually pays a monthly rent.

Caution: If a seller remains in the home for more than thirty days and the buyer does not take possession, the rental period could fall under the state's Landlord-tenant statutes, which have a whole different set of rules regarding rent payment, holdover, eviction, etc. This area is another one where a lawyer's advice would be quite useful.