Q: We plan to buy a new house, and want to submit an offer that will not become legally binding on us until we can sell our present home. The standard-form real estate contract that the sellers' agent has given us does not seem to address this issue. How can we purchase a new home, while at the same time protecting our need to sell the old one?
A: There are a number of standard (boiler plate) real estate contracts available in the Washington metropolitan area. These form contracts available through real estate agents, lawyers and stationery supply stores are useful, but are only the first step toward entering into a valid, binding contract. You should use that form contract carefully, adding addendums where necessary to make sure that your needs and desires are properly protected.
Keep in mind that the buyer generally makes an offer to purchase the seller's house. The seller has three options when he or she receives that written offer. It can be rejected out of hand, it can be accepted in its entirety or a counteroffer can be made. If the seller makes a counteroffer, then the ball moves back into the buyer's court, and the buyer then has the same three options. Until both buyer and seller fully agree on all material terms of a written document, there is generally no written contract, and in order to have a valid, binding contract for the sale of real estate, there must be a written document.
The standard-form contract contains a number of basic provisions, including the location of the property, the purchase price, the financing terms that the buyer wants and a provision dealing with the effect of a default by the purchaser. Most of the modern standard-form real estate contracts also contain a contingency clause, making the contract valid only if the purchaser obtains the necessary financing within a period of time -- usually 45 to 60 days from the date the contract is entered into. The better standard-form contracts also contain provisions dealing with obtaining a termite letter, the condition of the property to be conveyed at settlement and a statement as to who will pay points and the other closing costs.
However, as suggested earlier, even the best standard-form contract should only be considered as the first step in the contract process. Often the buyer or seller has a particular need which must be incorporated into the written document.
You have indicated that you want to make the contract depend on the sale of your house. You need to include, in a written addendum to the contract, what is known in the real estate business as a "contingency."
The legal dictionary defines a "contingency" as "an event which may occur; or a possibility." Thus, you want to carefully draft language that tells the seller that if you are unable to sell your house, you will not be able to buy the new one.
This language must be drafted with care. For example, if you merely state that "this contract is contingent on the ability of the purchasers to sell their present home . . . ," you have already raised an ambiguity as to the meaning of the word "sell." Does this merely mean that you have a contract on your house, or does it mean that you have actually gone to settlement. As we all know, there is a long road between entering a real estate contract and actually taking title to the property. This road is filled with loopholes and potholes, and you may find yourself stuck if you do not use the right language.
I would recommend the following language:
"This contract is contingent on the ability of the purchasers to sell their present house, located at . . . .If purchasers' present house does not go to closing, then this contract shall be null and void at the option of the purchasers. Settlement on this contract will take place on or about the same time that settlement is conducted on the sale of purchasers' house."
This is fine for the purchaser. However, the seller -- properly so -- will say that he or she does not want to take the house off the market for an uncertain period of time, only to find that several months down the line the purchasers can declare, at their option, the contract null and void.
Thus, the seller will want to add a contingency provision that is referred to as a "72-hour kickout clause." This language reads as follows:
"Purchasers agree that the seller will continue to market the property during the contingency period. If the sellers obtain a backup contract, the sellers will give the purchasers written notice of the existence of this backup contract, and the purchasers will have 72 hours from receipt of this notice in which to remove the contingency or this contract shall be null and void and the purchasers' deposit refunded in full."
This, in my opinion, is an acceptable compromise, since it gives the purchaser the right to back away from the contract if their current home is not sold, yet at the same time permits the seller to find another acceptable purchaser in the meantime.
Contingencies are often an important part of a real estate contract. They should be carefully thought through and drafted. They cannot be written at 2 a.m. after both parties have been involved in lengthy, heated and exhausting negotiations.
A real estate contract is a very important legal document. It must be respected.