Today we’re talking about an issue that I’ve seen come up quite frequently lately with agents regarding offers that are contingent upon the sale of the buyer’s other property, contingency offers, and backup contracts.
Oftentimes, these two things are interrelated.
Here’s the bottom line. When a listing agent receives an offer from that buyer’s agent that is contingent upon the sale of the buyer’s existing property, the addendum is called the “Addendum for Property for Sale by Buyer.” That being said there are a couple of mistakes that I see made on this.
First of all, the most common mistake that I see is that the buyer’s agent underestimates how long it’s going to take to get that other property under contract and closed.
Here’s an example of one that I just saw.
A 45-day contingency
45 days. Is the buyer’s current property already on the market? No. What you’re telling me is, you want us to accept an offer where, realistically, you’ve got to get the house under contract within about ten days, right? Fifteen days at the most, so that you can have a 30-day escrow period to get it closed and receive those funds. Because remember, according to that addendum, it’s the receipt of funds by the buyer that automatically eliminates the need for the contingency. Then they can buy the target property from the seller.
So be realistic. Be careful. Talk about what it’s going to take to market the property at this price point, and within the recent market. Maybe 90 days? How long have those properties priced at that price point taken to sell? Go 30, 40 days out from that to get a realistic contingency period.
Now, with regards to backup contracts.
There’s a common misconception out there that if a seller signs off on a contingent contract, in other words, that buyer has to sell their property to close on this one. There’s a misconception often by agents that simply receiving another offer on that property triggers the caveat in the contingency addendum whereby the buyers, the first buyers, have to either waive the contingency and move forward with the sale, or they are allowed to terminate the contract. Not the case. It’s not receiving an offer by the seller; it is signing off on that offer. It is executing a contract.
That contract has to be a backup contract because the first buyers still have right of refusal. They can waive their contingency and move forward with the sale. So the second one that comes in has to have a backup addendum attached to it, and it has to be a signed and executed contract in order to trigger that buyer choice of either you have to waive the contingency and move forward with the sale or terminate.
Another common misconception that I dealt with just a few days ago is, I had an agent call me up and say, “Kevin, I’ve got a listing of mine that’s under contract, and we had multiple offers, and we’ve got three agents wanting to submit backup contracts, backup offers. What I don’t know is, how do I put those in the proper order? We already have one backup in place, but now we’re going to put in place backup contracts number two, three, and four.”
You can’t do it. All right?
You are not allowed to have more than one backup contract executed in place at a time. There is no such thing as backup contract number two, three, and four. You can see why that rule exists. It would become a ridiculous, confusing situation to have multiple backups in place, determine which backup is in which order without having mass chaos ensue. So one backup contract only may be executed at a time.
Listen, these things are all very confusing, but we have to be masters of our domain. We have to be that fiduciary for our clients at the highest level, which means understanding the layers and the nuances of all of these contracts and addenda.
