Sellers take a risk when accepting offers to purchase their property that are subject to buyer contingencies and this article looks at ways to reduce that risk.
The "risk" sellers take with contingencies relates to the valuable time that may be lost if the buyer is unable to fulfil those contingencies. A contingent contract of sale "ties up" a property and takes it out of the market. Everyone hopes that the property will finally be off the market and that ownership will be transferred, but the reality is that this often just don't happen.
The strategies sellers can use to protect them against contingency failure focuses on motivating the buyer to make every effort to fulfil the contingencies, and limiting the amount of time that might be lost if the contingencies are not fulfilled.
Motivating buyers
Strategies to motivate buyers to fulfil contingencies as soon as possible are not really part of the standard training given to real estate agents in South Africa. So, if you grasp this concept and are willing to put it to work for you, you may be well ahead in the race to sell your property.
Sellers (and their real estate agents) need to be creative in their attempts to try and motivate buyers to make work of fulfilling the buyer contingencies. Every buyer will have different buttons that can be pushed in order to get them committed to fulfilling the buyer contingencies. Sellers need to use their powers of observation and imagination to build a strategy that will be effective for the individual buyer.
Motivation can be achieved through positive incentives or negative penalties. From the experience of some of the greatest people involved in the field of psycology, it is an accepted fact that positive motivation is far more effective than negative motivation. This does not mean that negative motivation will not work. It just mean that a smart seller will put more emphasis on the positive concequences of fulfilling the buyer contingencies.
If the seller notices during the sale process that a specific matter is very desireable to the buyer, they could use that as a reward for the quick fulfilment of the buyer contingency. This reward could be monetary, a physical object or anything else.
For example: The buyer only needs a mortgage for 80% of the purchase price, but they want to try for a mortgage bond for the full purchase price, including transfer costs, which translates into a 108% mortage. This means that the sale might be in jeapordy if the lender does not agree, resulting in two weeks of the seller's valuable marketing time that might be lost.
But the clever seller found out that the buyer's wife (a lover of antiques) adores the rickety old rocking chair in the spare bedroom. The buyer did not request the rocking chair to be included in the sale, and the seller was going to throw the darn thing away during the move in any case. So, he offers to include the "lovely antique rocking chair in the spare bedroom" in the sale, if the buyer fulfills the mortgage contingency within five days.
The old chair turns out to be a very effective positive incentive, which motivates the buyer to settle on a 90% mortgage and a 10% cash deposit within three days. The seller is happy and the buyer's wife is extatic! Do you get the picture?
The seller might have offered to contribute up to, say R5 000, toward the transfer costs, if he identified that as a possible motivator. The seller might have offered to contribute an amount toward the replacement costs of the worn out carpet in the lounge, or even offered to design the buyer's new company website for free. This strategy is not about the type of incentive, it is about the probability that the incentive will motivate the specific buyer to quickly fulfil the contingencies.
Negative incentives are usually a monetary penalty. A seller who is willing to agree to an offer where the purchase price will include, say R10 000 for transfer costs, couldn't really suggest that, should the buyer fail to fulfil the contingency within a few days, he will be smacked on the soles of his feet with a bamboo rod, now can he? So, he rather states that, should the buyer fail to apply for a mortgage bond within three days, the R10 000 provision for transfer costs would fall away.
This would be an effective negative motivator for the particular buyer. So, why not use it?
Saving time
The seller can also protect himself against the negative effects of buyer contingencies by limiting the time that might be lost, should the contingencies not be fulfilled.
Limiting time
The seller can limit the risk of a contingent offer by ensuring that the time period provided for the contingency is as short as possible. The less time the seller gives, the less time can be lost, right?
Well, not really. Sellers have to balance the need to limit the time allowed for contingency clauses with the amount of time that the contingency would need to be fulfilled by a reasonable person under normal to ideal conditions.
Limiting the time for mortgage approval in a mortgage contingency to 24 hours would just be a waste of time. Three to fourteen days constitute a reasonable time for obtaining a mortgage bond. A seller who insists on a 24 hour time limit would actually just be wasting his own time.
The same can be said for a sale contingency that gives a buyer only three days to find a seller for his home. The seller is only setting his own sale up for failure.
Escape clause
The obvious solution to the contingent contract is not to lose any time at all, which an escape clause effectively accomplishes.
The escape clause states that the seller continues marketing the property, even after accepting the contingent offer to purchase his property. If the seller then receives another, better offer to purchase the property during the contingency period, he can accept that offer as well, subject to the cancellation of the first contract of sale.
The seller then has to notify the buyer that the escape clause has come into effect, and that the buyer must fulfill the contingencies of their purchase agreement within the specified time period (usually 72 hours). Should the first buyer fail to fulfil the buyer contingencies, the first contract will become null and void and the second buyer's contract will come into effect.
If the seller is dealing with a real estate agent, he should insist that the agent continue to market your property, even after he has signed the first contract, if it contains an escape clause.
Because buyer contingencies exist for the benefit of the buyer, a buyer can declare the contingencies fulfilled at any time, even if the condition has not been met. So, a buyer can easily beat the escape clause deadline, but that is not always a good thing for the seller.
The buyer might still end up being unable to complete the purchase of the property if the conditions of the buyer contingencies are not fulfilled. So, a seller might still end up losing a whole lot of valuable time. That is why the wording of the escape clause is so important.
A good escape clause (for sellers) should require the contingent buyer to provide evidence of his ability to perform under the terms of the sales agreement when he declares the contingencies fulfilled. The sellers should have the right to reject the buyer's proof, in their sole discretion, if the proof he provides in not to their satisfaction.
In many instances, the buyer will not be able to satisfy the seller, because they obviously do not have the funds to permit them to go forward with the purchase. And it is in the seller's best interest to reject the buyer's offer in such a case.
Escape clauses are, unfortunately, subject to abuse by unscrupulous sellers to escape the current agreement in favour of a higher offer, even if the offer is also subject to buyer contingencies. So, a buyer might insist that language be included in the escape clause that will limit the alternative offers sellers may accept to offers that are not subject to any buyer contingencies.
The escape clause is a compromise for both the buyer and the seller, but has become an acceptable compromise in South African real estate transactions.
Protection against contingencies
Buyer contingencies can put sellers at a disadvantage and end up costing them valuable marketing time. But by making use of the techniques described in this article, they can effectively reduce the risk they are exposed to, should the buyer not be able to fulfill the contingencies.
