THE PCOA, OR POST-CLOSING OCCUPANCY AGREEMENT, IS COMMON BUT OFTEN MISUNDERSTOOD
A PCOA is when a seller will stay in the property past the closing date or settlement date. PCOAs, also known as Post-Closing Possession Agreements, Post-Occupancy Agreements (POA), or “rent backs,” can vary widely in price and structure.
On one level, it’s an integral part of many real estate transactions, especially with today’s fast-moving market. In fact, PCOAs have become so commonplace that formal rent back agreements and language have been created and implemented by state real estate commissions. But they reach beyond the typical contract process, outside of the touch points of your agent, and into the realm of state laws and property rental agreements.
WHO NEEDS A PCOA?
The reasons for post-occupancy agreements are numerous. For one, they’re becoming common negotiating points with a housing market that continues to heat up. When the sale process moves so quickly, quite often a buyer will have to agree to a seller’s request for a post occupancy time period. In today’s market, there may be several competitive offers on the table at once, and a generous or lenient post-occupancy clause could make an offer more attractive.
Reasons that a seller may ask for a post-occupancy agreement include waiting for a new home to be finished, needing the proceeds from the sale to make a partial cash offer on another property, the desire for their kids to finish out a school year, or to have more time for moving out, often in contingency with another sale.
WHO PAYS IN A PCOA?
In these agreements, there will always be some kind of language about a deposit held, either by the buyer (who will essentially be your landlord during the post-closing occupancy), or in escrow. It may be negotiated in an offer letter, and then in a final sales contract, that a certain amount of rent will be charged for the extended occupancy, whether it be for a week, a month, etc.
Sometimes it will be more of a grace period, perhaps 14-days of post occupancy, rent free. In cases like this it is either viewed as a courtesy or a point of negotiation. Other times, market value will be charged for a month’s rent back, such as $2500 for average rent based on location and square footage, which may also reflect an average monthly mortgage for someone in the same sized house.
An extended post-occupancy agreement would typically last no longer than 90 days. In these cases, a portion may be written in as “free,” and additional time (say, beyond the first 30 days) will be charged a rent or fee that would at least cover the buyer’s mortgage, or is roughly based on market value.
Typically, funds for the deposit and/or rent are set into escrow at the seller’s closing, and then dispensed to the buyer at their closing. That deposit and your rent back then becomes a matter of state law and landlord/tenant contract, and your realtor no longer has any jurisdiction in decisions on these matters.
WHAT ARE THE RISKS OF PCOAS?
Ultimately, both parties must be protected in contract due to the potential liabilities mentioned above. “These are not cut and paste agreements,” advises attorneys Denha & Associates PLLC. “Instead, a sort of legal finesse is required to make certain that all parties are protected as there can potentially be liability if these agreements are not structured and reviewed properly.”
“Sellers should be liable for any injuries or loss or damage to property post closing…and would need to take this into consideration and carry their own liability insurance coverage until they vacate the premises to ensure they do not expose themselves to personal liability by not carrying insurance during the post closing period,” continued Denha.
Denha & Associates also brings up another concern with PCOAs, and that is what can happen if a seller/renter refuses to leave after the post-closing move out date, or if they are unable, or delayed in moving out for whatever reason. “Suddenly the buyer is a landlord, suing to evict the seller from the home, which costs thousands more dollars, and the buyer now has to maintain the premises. These situations should all be considered in the rent-back agreement and the appropriate provisions included to deal with this possibility,” they say.
The price for a delayed move out should be specified in the POA, in the same way it would be spelled out in the sales contract. This is typically in the range of $200-$300 per day. Unfortunately, legal help for these types of issues can be expensive and difficult to find. When disputes arise, parties may end up relying on the title company or a mediator before entering into litigation.
HOW DOES THE HANDOFF WORK IN A PCOA?
At the end of the PCOA time period, the seller—now the tenant—must vacate the premises. The condition that the property must be left in should be clearly spelled out in both the sales contract, and again specifically in the PCOA section of the agreement. It is to the benefit of all parties to spell this out, asking for a property to be left in “broom clean” or “professionally cleaned” condition. Specify whether or not any additional items like mowers or tools, for example, are to be left behind, based on the included items clause of the sales contract.
Both sides matter here. A buyer doesn’t want to wait 60 days to take possession of their new home, only to come in and find it had been treated like a rental with unexpected wear and tear, or broken appliances that had not been previously disclosed. Nor should a seller/renter be held responsible for additional cleaning or haul off that wasn’t a part of their original sales contract.
WHAT HAPPENS AFTER THE PCOA?
A final inspection should be scheduled and performed at the end of the rent-back period, at which point the buyer informs the title company to release the security deposit back to the sellers. In some instances, the security deposit will be issued to the buyers, held under the jurisdiction of state-by-state rental law. Denha explains, “If there is a problem during the final inspection, the buyers and sellers need to come to an agreement on how the security deposit is to be distributed.”
In conclusion, a post-occupancy agreement is a normal part of many contemporary real estate sales contracts and can be an ideal solution to navigating complex timelines during closings. When buyers and sellers can work together and create a timeline and structure that works for all involved, these agreements are a way to add value to a contract and make everyone happy in the end. As always, talk to your Nest agent to see if this option makes sense for you.