Moving in before closing: Just say “no.”
A question that often comes up in our house flipping business is whether or not we’ll allow the buyer to move into a house before closing.
The buyer’s reasons for this request run the gamut. Maybe they’re selling their current home before buying ours, or maybe our closing date got extended past the first of the month and they don’t want to pay another month’s rent where they currently live.
Be careful with this request.
We’ve always said, “no” in these situations for a variety of reasons. First, we don’t want to get into a tenant/landlord situation with our buyers. We run two different companies: an S-corporation for our flips and an LLC for our property management. The purpose of this setup is to make our intentions clear to the IRS as far as what we plan to do with a property by what company owns it.
Flips are taxed quit differently than rentals. The last thing you want is the IRS to decide that all of your rentals were really flips that didn’t sale fast enough, and then tax you at the flip rate. By allowing a buyer to move in, and or pay rent, can really muddy the water here.
The next thing to consider is your insurance. If you’re flipping a house, you’ll have a vacant home policy on the property. Once someone moves in, the house is no longer vacant, thus voiding that policy. In this situation, you’d have to change to a landlord policy, pay for it and then wait for a refund on the premium for the vacant policy. That’s a hassle.
And now you have people living in your brand-new, beautify-remodeled house. As soon as people start moving in, things get damaged. Now it may not be bad damage but scuffed walls and muddy footprints on carpet happen just as soon as the moving trucks show up.
So what happens if the day before closing, you find out your live-in buyers purchased new furniture on credit the day they moved in? What if this messed up their debt-to-income ratio, and now they can no longer get a loan to buy your house? Ruh Roh Raggy.
That’s a big reason we say, “no” every time.
Most of the time, people ask before they attempt to move things in, but we had an instance recently where our buyer started doing so before closing without our permission or that of any of our representatives.
On the day of closing, we went by to get the staging material. While there, we noticed a refrigerator in the kitchen that wasn’t ours and that we hadn’t installed. Later that day, we learned the buyer’s agent had permitted the buyer to bring the appliance in a week early without our permission. That was not cool.
The sale went through, but let’s consider what could’ve happened.
Refrigerator wheels are renowned for scourging, scratching and sometimes gouging new floors. Had this had happened, and had the buyer not been able to perform, we would’ve been left with damaged floors. In this hypothetical instance, we might have to take the buyer, and their agent who unlocked the supra box and let them in, to court in order to have our floors fixed. But that would take a lot of time. In other words, we would need to fix the home out of pocket to get it back on market in a timely manner.
That would be a small fix, but what if they had failed to tighten the ice maker hose all the way and it had leaked for a week while no one was there? That could have caused all kind of damage with very costly repairs.
Are you seeing why allowing buyers to move into a house before closing isn’t a good idea? So, the next time someone asks to move in before closing, just say, “no.”
Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.