Negotiating a Sales Agreement: Other Contingencies
I used to know a builder who always said, “1 don’t care what the sales agreement says, as long as there’s a ‘subject to’ in it.” He was, of course, referring to a contingency clause, a condition that said the sale was subject to the occurrence of some action (or lack of action).
While I think he was a bit careless in not caring what the clause was about, his point was well taken. Almost any contingency will weaken a sales agreement and threaten it if there’s a lawsuit and the matter gets to court.
Some buyers, well aware of this, will insist on one or more contingency clauses. This, they feel, gives them a way to back out of the deal and not have a concern over the deposit’s being tied up. When the sole purpose of these contingencies is to offer a back door out, I refer to them as frivolous contingencies.
On the other hand, sometimes the buyers are sincere but new to real estate or simply want to have a lot of such clauses inserted because it makes them feel more secure. Knowing they can back out at any time may be what allows the buyers, psychologically, to make the offer.
From the seller’s perspective, each new contingency weakens the deal. If I’m a seller and the buyer insists on, for example, making the sale subject to her husband’s getting a raise from his employer or a new job in the area or any such thing, I have to ask myself whether I really want to sign the deal. After all, the buyers can control the contingency. They can forget to ask for a raise or look for a new job.
In short, they can back out of the deal any time they want and I’m left holding nothing.
What to Do about Contingencies.
There are three ways to negotiate an unwanted contingency in a sales agreement.
The first is to verbally define what it is. For example, if the buyers insist on what the seller sees as a frivolous contingency and you’re the seller, explain that a condition that virtually makes the agreement nonbinding on only the buyers won’t be acceptable. Then, once everyone understands what a disadvantage this puts the seller under, you, as a seller, can insist the contingency be removed. Or, if you’re to accept it, the buyers have to make other concessions.
Second, if you, the seller, want to move forward with a sales agreement with frivolous contingencies, you may want to insist on the right to keep showing the property and accepting back-up offers.
One such contingency is when buyers insist on having the right to first sell their old home before they buy yours, as we saw in before post. They may want a clause inserted that says the purchase of your home is contingent upon the sale of their existing home. In a hot market, few sellers would be tempted to sign such an offer. However, in a slow market, many sellers would. However, if you’re a seller and you do sign, it would be wise to include a sentence or two that not only allowed you to keep showing the property and to take back-up offers, but said that if you got a back-up offer, the buyers would have, for example, 48 hours to remove the contingency or would have to back out of the deal.
In other words, yes, you’ll hold your house for the buyers while they try to sell their old home. But, no, you won’t take your home off the market. And, if you got a more solid offer, they’d have to agree to buy your home, even without the sale of their home. It’s a way to have your cake and eat it too.
Third, smart negotiators will put a time limitation on every contingency. It might be a month or a week or 72 hours, but the buyers (or sellers) would have only a certain amount of time to act on the contingency, or else it would have to be removed. For example, the buyer may want a contingency relating to a home inspection. This is perfectly natural and to be expected. However, the seller may go along only if the buyer agrees to remove the contingency within 14 days. This means the buyer must get the inspection report and approve it within two weeks and sign a release of the contingency. If the buyer fails to do this, then the sale is off and the seller can resell.
Or a purely frivolous contingency may actually be that the buyers want to make the deal subject to the approval of their aunt in Maryland. Maybe they rely heavily on this person’s judgment (and financial support!). If everything else in the deal were to my liking and the prospect of another buyer any time soon was slim, yes, I would agree. But, 1 would put in a time contingency. Yes, you can secure the approval of Aunt Mary, but she has to give it within three days. In other words, the buyers have to remove the contingency within 72 hours to keep the deal alive. But, they may argue, it will take longer than that for Aunt Mary to get out here to see the house. Fine, make it four days.
The point is that almost any kind of frivolous contingency can be mitigated by stipulating a strict time limit. It has to be cleared within certain time parameters for the deal to continue. If it isn’t cleared, there is no deal.
TIP
Remember, any time you, the buyer, offer a contingency, particularly a frivolous one, you are making a weaker offer and will undoubtedly have to pay for it either by having the offer rejected outright, or by making concessions in price or other terms. A savvy buyer will put in as few contingencies as possible to get better terms and price.
TRAP
I’ve seen some gutsy buyers in a hot market pull the financing contingency out! They knew they were competing with other buyers for the same property and they made a totally “noncontingent” offer. They would buy the property, period. I’ve even seen such buyers make the deposit check out directly to the seller! What this means, of course, is that if they can’t conclude the sale for any reason, they are likely to lose their deposit. And, they could have an angry seller pursuing them in litigation. I don’t suggest such an offer for the faint of heart.