As the market has shifted, I’m seeing more and more offers roll across my desk that are contingent on a Buyer selling a home in order to purchase another. During the recession, it was absolutely rare that I saw one mainly because my listings were mostly distressed sales – not eligible for this type of scenario.
In the past, the Contingent Sale addendum allowed equal protection for both parties. The Buyer had a time limit to buy and if their home didn’t sell, the contract could be made null and void. For the Seller, if another Buyer came along with a better offer (not contingent on a home sale), they could compel the current Buyer to remove the contingency within 48 – 72 hours (known as a kick-out clause) otherwise the current sale was null and void and the Seller could move on with Buyer 2.
When the state association of Realtors and the NC Bar revised this form, the concept of a “kick-out clause” was removed altogether and left in its place is a document that does little to protect the Seller.
If there is a Contract on the Buyer’s current property
If, at the time of contract, there is a Contract on the Buyer’s property, it’s up to the Seller to request a copy of that contract prior to the end of the Buyer’s Due Diligence Period. If the Seller doesn’t request a copy, the Contract will be made null and void and the Earnest Money returned to the Buyer.
So if the Buyer requests a 60 day due diligence period in order to close the contract on their home on day 70, on day 61, the contract would terminate with any Earnest Money paid back to the Buyer if a copy of the Buyer’s contract is not received.
As a Seller, it’s important to obtain a copy of the Buyer’s contract before even signing off of their contract on your home.
What if Their Home Doesn’t Close?
In the standard North Carolina Offer to Purchase and Contract, there is an extra 14 day grace period automatically added on to the last agreed upon closing date to help facilitate the closing. On occasion, a lender will blow past a close date and the 14 days are there to help prevent an awkward or tense re-negotiation of the contract for a new closing date (it still happens though).
So you’d think that, in a contract contingent on a home sale, the Contingent Sale addendum would allow the same 14 day grace period? Well, it doesn’t. It doesn’t even come close! In a transaction where a Buyer’s home was scheduled to close and doesn’t by the contract date, the Contingent Sale addendum allows the Buyer to terminate the current contract “within 3 days following the Settlement Date of this Contract”.
Here’s a an example to try to explain this:
A is purchasing B’s house. B makes an offer, Contingent on B’s home closing, on C’s house. A, B, and C are all scheduled to close on July 1 with A and B closing first and then B and C closing right after. A’s lender is unable to perform by the contract date and closing for A and B is moved 5 days. Unless B and C also decide to move their closing the same 5 days (or longer), B can terminate their contract with C and receive all of their Earnest Money Back…and there’s nothing C can do about it.
What if the Buyer’s Contract is Terminated?
If the Buyer’s contract to sell their home falls through at any time, and the Buyer provides the Seller with written documentation as such, then either party may terminate and the Seller is obligated to refund the Earnest Money Deposit to the Buyer.
What if the Buyer Doesn’t Want My House?
If the Buyer of your home does not want your property any longer and you are under a contingent sale addendum, the Buyer can delay their closing until after your last agreed upon closing date and then terminate. The Earnest Money would be refunded to the Buyer.
Here’s how this shakes out:
A is the Buyer of B’s home and B is buying C’s condo. The contract called for A&B to close on July 1 along with B&C to close later that day. If B loses the warm and fuzzies about C’s house and wants their Earnest Money Back, they need only delay the A & B closing until after the B & C closing was to have occurred (so delay the A& B to July 2). The Contingent Sales Addendum makes the closing date Time is of the Essence (so the closing date is to occur that day – no 14 grace period).
So no matter how to you slice it, the Buyer has numerous opportunities to terminate their contract and receive their Earnest Money back.
Ultimately, the Contingent Home Sale Addendum is here to stay but hopefully revised in July when the forms are re-issued. Until then, if you choose to accept a Buyer that has made your sale contingent on their home closing, remember to:
- Request a copy of the Buyer’s Contract on their home.
- Watch your dates. If the dates change on their purchase and you want to complete the sale, change your dates too.
- It’s a good idea to have your agent watch the MLS or keep up with the other real estate agent to gauge the status of the Buyer’s – Buyer contract.
- Negotiate as much Due Diligence Money as possible. It’s the only thing you will keep if the Buyer terminates their contract.