Selling With A Contingency

Written by Posted On Thursday, 03 September 2015 12:12

Question. We have been trying to sell our house for several months, and have just received an offer. The price is right, but the buyer wants the contract to be contingent on the sale of her own house. Our real estate broker has suggested that she could list the buyer's property, and would probably be able to sell that house quickly. What do you think of this kind of contingency?

Answer. You have raised two different questions, and both deserve a comprehensive response.

I personally do not like contingencies based on the sale of the purchaser's current residence. However, it is a fact of life which sellers have to accept if they want to sell their property quickly. Not everyone can afford to buy a new house while at the same time having to carry the financial burden of their existing home.

A contingency is a legal concept which basically means that if a particular condition is not met, then the real estate contract becomes null and void. In a home sale contingency situation, if the buyer cannot sell his or her house, then the buyer does not have to go forward with the sales contract to buy the new property.

Clearly, such a contingency is in the best interest of the buyer.

However, there are certain protections that a seller can obtain if they are properly incorporated into the sales contract.

If you, the seller, are prepared to accept a home sale contingency, this means that you will not have any certainty as to whether your buyers will in fact go to closing on your house until such time as the buyers have contracted or sold their current residence.

Thus, one important provision to add into any such contingency is a time limitation. How long are you as a seller prepared to keep your house off the market? Generally speaking, these contingencies expire by their terms between 90 and 120 days from the time the contract is entered into. At the end of this time period, the contract can be declared null and void at the option of the seller.

On the one hand, you have to be realistic; you cannot put a short time fuse on the buyer, because he or she may not be able to sell the home within such a short period of time. On the other hand, you do not want to have this open-ended, whereby the buyer at any time in the future can suddenly announce their house cannot be sold, and the current contract is null and void. Thus, a range of between 90 and 120 days is a fair compromise between both of these positions.

A seller should also incorporate into the contract what is known as a "kick out clause." The usual language reads as follows:

Seller shall have the right to continue to show the property for sale to others. On receipt by seller of any offer from another purchaser which is acceptable to seller, seller shall give purchaser ___ hours written notice to remove the contingency regarding the sale of purchaser's present residence. In the event purchaser fails to waive said contingency in writing and/or fails to provide seller with evidence satisfactory to seller that purchaser is able to complete settlement without regard to the sale of purchaser's present residence, then seller may, at seller's sole discretion, declare this contract null and void, in which all deposit money shall be refunded to purchaser. For the purpose of this paragraph, the ___ hour period shall commence upon delivery of the aforementioned written notice to purchaser or to the real estate agent, and such delivery date and time shall be recorded in writing on a separate receipt. Time is in the essence for this paragraph.

This will give the seller the opportunity to continue to market the property, and most real estate agents and brokers will be happy to assist in these efforts. If the seller obtains another satisfactory offer, the existing purchaser will be given a period of time in which to determine whether to cancel the contract or to go forward with the contract. The general rule of thumb is 72 hours.

It is important to note, however, that even if the existing purchaser decides to remove the contingency and go forward with the purchase, that purchaser must demonstrate satisfactory financial ability to the seller that he will be able to purchase even though the current residence has not yet been sold. If this language is not included in the real estate contract, the purchaser could remove the contingency, but nevertheless still not be able to get financing until the house is sold, and obviously the settlement will not take place.

The sellers should also keep in mind that if an acceptable second offer is received, they cannot accept that offer until they have given the 72 hour notice to the first purchaser. Alternatively, the seller could accept the offer as a "back up" contract, making it clear that this is a back up contract which will not become the primary contract until the seller gives written notice of that fact to the second purchaser.

Clearly, the seller does not want to be in the position of having sold the house twice under two different contracts.

By incorporating a kick out clause, this permits the seller to continue to show and market the property, while at the same time preserving an interested purchaser who presumably will diligently attempt to sell his own house.

The second issue raised by your question is, in my opinion, quite controversial. It is common practice for real estate agents or brokers to want to obtain a listing so that they can sell the purchaser's house also. However, there is, in my opinion, a clear potential conflict of interest created by these dual transactions. On the one hand, the real estate agent owes a duty to the first seller. Now, on the other hand, by obtaining a listing from the purchaser, the agent also owes a duty to that individual. It may very well be that the interests of the two will differ. The seller wants the purchaser to sell quickly, so that the purchaser will go to closing. The purchasers, on the other hand, will no doubt want to get the best possible price, and may not be anxious to settle on the new contract until their own house is under contract. Indeed, a properly drafted home sale contingency should make the first contract contingent not only on the purchaser obtaining a contract for the sale of their house, but also on the actual settlement on that house.

Additionally, when an agent receives certain information, there is a duty to disclose that information to the principal. There are times, however, when the purchaser make want to discuss and disclose certain private and financial information to a broker, which information may be significant if known by the seller. My recommendation in this case is for the purchaser to obtain his or her own real estate agent who will not have to be concerned with the possibility of a dual loyalty.

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Benny L Kass

Author of the weekly Housing Counsel column with The Washington Post for nearly 30 years, Benny Kass is the senior partner with the Washington, DC law firm of KASS LEGAL GROUP, PLLC and a specialist in such real estate legal areas as commercial and residential financing, closings, foreclosures and workouts.

Mr. Kass is a Charter Member of the College of Community Association Attorneys, and has written extensively about community association issues. In addition, he is a life member of the National Conference of Commissioners on Uniform State Laws. In this capacity, he has been involved in the development of almost all of the Commission’s real estate laws, including the Uniform Common Interest Ownership Act which has been adopted in many states.

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