You've finally decided to put your home on the market and to begin the hunt for that new home. And you do realise that you've entered a hectic period in your life, filled with numerous uncertainties and a myriad of possibilities, right?
If everything goes according to plan, hundreds of interested buyers will be touring the inner sanctum of your home, and you will, in turn, be a spectator to a large number of other home sellers' daily lives. Your peaceful home life will be disrupted and your marriage will probably near the brink of divorce a few times. Your dreams will be filled with legal mumbo-jumbo and hostile negotiations. And to cap it all, if you don't understand and insist on protective contingencies, your home purchase and sale can financially ruin you!
Yeah, I paint a grim picture, which may not necessarily come true, but all the things mentioned above can potentially happen to you. So, if you didn't know it already, it is my duty to inform you:
Selling and buying residential real estate can be the worst experience of your life. So, how can you minimize your risk?
The more you know about real estate transactions, and the better you prepare for the stuff that can go wrong, the less painful your house move will be. Hey, it can even be a happy experience!
This article will focus on the contract contingencies that can protect your financial position in the process of purchase and sale of a home (But there are articles around here that address all the other negatives mentioned.)
The process of buying a new home and selling an existing residence can become quite an intricate affair, so keep calm and know what your options are:
Buying before selling
Some homebuyers prefer to hunt for a replacement home before putting their own home up for sale. They feel safer with the idea of having some place to go before signing a contract that will pass ownership of their current home to someone else.
This kind of real estate purchasers need to make sure that they make their offer to purchase the new house contingent upon the sale of their existing property. Failing to add the "subject to sale" contingency to the proposed purchase agreement could mean that they are bound to go ahead with the purchase of the new house even if they fail to sell their existing place.
Few people can afford to buy a second home without the proceeds from the sale of their current property. This could cause the unfortunate purchasers to fall foul of the purchase agreement and be liable for damages to the sellers, for breach of contract.
As mentioned before, many homebuyers need to include a "subject to sale" contingency in their offers to purchase a home. This can cause a domino effect where a long list of sales are each contingent on another property sale.
If all goes according to plan, the dominoes will fall in place and all the properties will be transferred in sequence. But if one of the transactions in the chain "falls through", the transactions down the line will also fall through.
Selling before buying
Another approach that buyer-sellers could take is to sell their current property first, before making an offer to purchase a new property. This can give the sellers an edge when they become buyers and have to negotiate the terms of the purchase agreement for a new house.
If the property has already been sold and transferred, the proceeds of the sale will most probably be available immediately, when it becomes time for buying. In this case, the seller-buyers can forego the "subject to sale" contingency, which would otherwise be needed.
Buyers must be very careful about leaving the "subject to sale" contingency out of their offer to purchase if the transfer of the property has not been finalised yet. Having a signed contract of sale is NOT the same as having actually completed transfer of a property!
If the sellers are afraid that they might not be able to find a replacement property for their home, they could choose to include a "Home of choice" contingency in their contract of sale for the current home. This allows them to escape from the sales transaction if they cannot find a new home that satisfies their needs and preferences in a specified time period.
A "home of choice" contingency would, however, mean that the buyers cannot be sure if they have bought a home before the allotted time has expired, or until the sellers declare the condition fulfilled. So, sellers may have to make concessions in price or other terms to get buyers to agree to this contingency.
Offering to buy more than one property
Because buyers cannot be sure if their offer to purchase a certain property will be accepted or rejected, conditions may require them to "hedge their bets", by submitting bids on more than one property. This usually happens when time is of the essence, or if the buyer activity is especially high for the properties they consider buying.
The buyers' intentions are not to purchase all the properties they make offers on, but to buy just one. They should therefore include "subject to rejection" contingencies in all the offer documents they sign following the very first offer, failing which, they may be liable to purchase ALL the properties, or face breach of contract penalties.
Buying with borrowed money
Almost ever real estate transaction in South Africa depend on the granting of a mortgage bond to finance the purchase. This means that, should the mortgage application fail, the purchaser would most probably not be able to get in a financial position to see the real estate transaction through to transfer.
A mortgage bond contingency allows a buyer who will be relying on a home loan to purchase a property, to safely make an offer to purchase. The mortgage bond contingency has the effect of "holding out" the property for the buyer, until the lender can give a final answer as to the approval or rejection of the loan application.
A buyer who needs a home loan to fund the purchase of a property, who fails to include a mortgage bond contingency in the contract of sale, will be bound to perform to the contract, even if a mortgage application gets declined. If such a buyer cannot come up with the full purchase price for the property before the contractual deadlines, he/she will be in breach of contract and may be liable for all kinds of costs and damages.
Selling to a Contingent Buyer
Contract contingencies can have the effect of either suspending the contract until some requirement is met, or to cancel a contract in the event of some requirement is met or is not met, by a certain date. These contingencies are known as suspensive conditions (suspends the contract) and resolutive conditions (causes the contract to become null and void) respectively.
Until suspensive conditions have been met, the contract of sale is therefore not legally binding yet. Neither party can therefore be sure if they have bought or sold the property in question. Adding an escape clause to the sales contract can mitigate this uncertainty.
A 72-hour escape clause would normally allow the sellers to keep marketing the property, and to accept an unconditional offer to buy the property. But if the suspensive condition in the contract is for the seller's benefit (such as a "home of preference" contingency), a 72-hour escape clause could also be worded to allow the buyers to keep looking for another property, and even offer to purchase a suitable property, contingent on the first transaction falling through.
The party who has the benefit of a suspensive condition will have 72 hours to declare the condition fulfilled, after receiving notice from the other party to the contract that the 72-hour escape clause is being called up.
The 72-hour escape clause thus functions as a resolutive condition.
Safeguards For Buyer-Sellers
Now, I hope that all the funny terms and concepts have not sent you running for the hills. Contract contingencies are actually quite simple things, but they can really come in handy when you are entering into an agreement of this magnitude. You just have to know what protection you need in a contract, and how to get that protection for yourself.
The safeguards are there. So, USE THEM!
