Even the most organized, well-planned real estate transactions can go awry or fail to close – it’s the nature of the business. Sometimes after a deal falls through, parties simply move on and continue in their attempts to buy or sell, but other times, they find themselves in unenviable positions, like forfeiting money or finding themselves in court.
The good news is that if you are buying or selling a home, there are ways you can contractually protect yourself and your assets. In real estate, contingencies are clauses or addenda that are added to a contract when a sale is dependent on other occurrences. Such conditions may include an inspection, the approval of financing, the sale of an existing home, or the acceptance of back-up offers – just to name a few.
Keep your options open
There are many ways buyers can shield themselves from undesirable positions that may arise in a real estate transaction.
The option fee is a payment that a prospective buyer gives to a seller. The fee pays for the buyer’s right to terminate the contract for any reason, at any point during an “option period.” The length of the option period is negotiable, as is the amount paid.
During the option period, the buyer has a chance to perform due diligence and conduct further investigations into the property, like getting a home inspection. It also keeps the seller from selling the house to anyone else during this time. During this option period, the seller may negotiate and accept back-up offers, but he or she is still contractually bound to sell the property to the original buyer unless that buyer terminates the contract.
If the buyer does not terminate the contract, the fee may be credited at the closing table.
I’ll buy it … if I can get the money
What if a buyer has a signed contract on a house and learns that his loan application was not approved? If he hasn’t signed the right form or agreed to the correct terms, the seller could legally keep the earnest money deposit. A signature on the Texas Real Estate Commission’s Third-Party Financing Condition Addendum can release a would-be buyer from penalties, including forfeiture of earnest money, as well as the obligation to purchase the home.
First things first
In many circumstances, a buyer needs to sell one home before buying another. For this situation, TREC offers the Addendum for Sale of Other Property by Buyer, which permits a buyer to terminate a contract if he is unable to sell his property before closing on the home he’s offered to purchase. As is the case with many contingencies, the time frame is negotiable.
In this agreement, if the prospective buyer is unable to successfully sell his current home before an agreed-upon date, either the contract will terminate and the earnest money is refunded or the buyer can choose to waive the contingency – that is, complete the purchase.
Did they make their best effort?
These forms are not slanted toward buyers. Interestingly, the same forms that provide protection to buyers offer advantages to sellers, as well.
In a situation where a buyer is awaiting loan approval, the Third-Party Financing Condition Addendum states that the buyer must “make every reasonable effort” to obtain approval for financing. Furthermore, the agreement authorizes a lender to release information about the status of the loan-approval process to the seller or the seller’s representative. This precludes a buyer from getting out of buying a home by falsely claiming that the loan application was denied. In other words, the buyer must be able to prove that they were unable to secure a loan or they could be required to perform under the terms of the contract.
Still accepting offers
TREC’s Addendum for Sale of Other Property by Buyer protects sellers who are party to a contract in which a buyer must sell one property in order to proceed with the purchase of another.
This form states that if the seller receives and accepts a second offer as a back-up contract, then the seller must notify the first buyer of the second offer. At that point, the initial buyer can choose to either waive the contingency and buy the home or terminate the contract and receive a refund of the earnest money, at which point, the second offer becomes effective.
Either way, the seller has a contract in place.
If Smith doesn’t, Jones will
Sometimes a buyer is interested in a particular house, but learns the seller has already agreed to sell the property to another buyer. Well, one thing I’ve learned in this industry is that deals can fall through for any number of reasons. Because of this, sellers may negotiate and accept back-up offers from interested secondary buyers. These offers are contingent on the first contract failing to close.
This contingency is a security blanket for sellers – they can quickly move on to another deal if the first one falls through.
Talk with an expert
Buying or selling property is a complex matter that can involve multiple contracts and addenda, as well as unforeseen circumstances. Talk to your Realtor about how to protect your interests. Realtors are obliged to treat all parties fairly and to put their clients’ interests above their own.
For more helpful information, visit gfwar.org.
About The Greater Fort Worth Association of Realtors
The Greater Fort Worth Association of Realtors is one of more than 1,200 local boards and associations of the Realtors nationwide that comprise the National Association of Realtors. As the nation’s largest trade association, NAR is “The Voice for Real Estate,” representing over one million members involved in all aspects of the real estate industry. The Greater Fort Worth Association of Realtors serves approximately 3,200 members by providing MLS services, education, governmental affairs, etc. For more information, visit www.gfwar.org.