Pre-possession or Escrow?

J Philip Faranda December 19, 2008

After a rather arduous marketing effort, I have a listing under contract with a cash buyer who can close at any  time. The cash isn’t his; a generous friend is holding a private mortgage. Even though my seller client bought the house only 2 years ago, we found out that the deck and downstairs bathroom do not have certificates of occupancy. It is only a formality, but those things have to be filed for and provided.

All parties have agreed to escrow funds so that we can close this week and ensure that the compliance issues will be handled. No big deal. Everybody wins this way- the buyers are in for Christmas and have their daughter registered for school before the 1st of the year, and my sellers can finally close the book on two years of owning in a home too far from their jobs.

Of course, my seller’s attorney voiced his opinion that we should not do it that way. He suggested that it would be better to for the buyers to rent the house until the COs are procured, and then close. This is madness. Closing with money in escrow does carry the theoretical risk of losing the escrowed funds, but making my clients unwilling landlords opens them to far worse risks.

First, my clients would be liable for anything that happens while these people are living in the home renting back before closing. What if the house burns down? What if the furnace breaks? What if their small daughter drowns in the large inground pool?

Moreover, delaying the closing in this market is tempting fate. What if the buyer loses his job in this economy and backs out? What if they decide that they don’t like a neighbor, or the sound the refigerator makes? If these people elect not to close for some reason, how do we get them out of the house?

I never met an attorney who likes pre-possession, especially when there are options to prevent it. Yet this lawyer prefers it. I should add that this guy represented them in their purchase 2 years ago and didn’t catch the out of compliance-deck and illegal bathroom. Bad job. Opening the client up to risking losing the sale or having a serious liability problem is also bad advice in my view. My clients agree with me and are going to instruct him to escrow, but I remain disturbed by his questionable counsel.

Am I missing something here?

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