As a seller, it is very difficult to back out of a sale after both parties have signed the purchase agreement. Most of the “loopholes” in the purchase agreement protect the buyer, not the seller.
So once you sign the contract, you must follow through with the sale even if you receive a more competitive offer, struggle to find a new home before closing, or simply have a change of heart. Without a relevant contingency or significant buyer error, you would need to fight the contract in court, which can be a drawn-out and expensive battle.
To protect your interests and assets and ensure a smooth transaction, you must clearly understand all conditions and contingencies before you sign on the dotted line.
Examine the buyer’s ‘out clauses’
There are plenty of reasonable requests buyers make in the purchase agreement, but there’s also potential to include an easy-out clause masquerading as minor contingencies.
Depending on what issues or complications arise after signing, you may face closing delays — or worse, lose your buyer through a loophole. As a result, the buyer walks away with their earnest money in hand, leaving you with a sale gone sour.
Before you accept an offer, consider the following common contingencies:
Inspection contingency
This contingency requires a professional home inspector to evaluate the home and allows the buyer to back out if they’re not satisfied with the assessment. Typically, this contingency expires in seven to 10 days, during which time the buyer can arrange for an inspection.
Even if you’ve conducted a pre-listing inspection, some buyers may still request their own inspection and request that you complete or compensate for needed repairs before closing. Some of the most common repairs that buyers request after inspection include:
- Removing dead trees
- Fixing sewage problems
- Eliminating fire hazards
- Repairing roof issues
- Replacing damaged wood
A buyer may also request certain specialists to assess the home for pests, asbestos, and radon issues.
However, in a hot seller’s market, where more homebuyers compete for fewer properties, Cummings says buyers are less likely to make repair requests as they can consider other offers. “Sellers are like, ‘Hey, we’ll go to one of our ten backup offers,’” he says.
Appraisal contingency
An appraisal contingency stipulates that a buyer can back out of a sale if the home appraises for less than the agreed-upon price.
Appraisals can take anywhere from a few days to a few weeks, depending on your home’s size and the current market conditions. The appraisal typically takes place after a home inspection.
If the appraisal values a home under the contract value, the buyer can renegotiate their offer or leave the deal. The seller may have to cover the difference between the home and loan values, or the sale may fail altogether.
Financing contingency
This contingency allows the buyer to back out of the contract if they can’t obtain a mortgage.
If your purchase agreement includes a mortgage contingency, it can take a month or two for the buyer to close on their home loan. Financing problems often cause settlement delays, which can lead to extended contract timelines or even cancellations.
Home sale contingency
With a home sale contingency, the buyer agrees to purchase your home if, and only if, they sell their house first. While this may seem like a rational request from a buyer, it is a particularly risky contingency for sellers.
To avoid this contingency, sellers can make a counteroffer, requesting that the buyer remove the stipulation. They can also suggest alternatives, such as a bridge loan, or refuse to sign a contract until the buyer secures an offer and closing date on their current property.
Other contingencies
Buyers may also add custom contingencies to the purchase agreement. For instance, one Washington homebuyer included a contingency that a feng shui specialist must evaluate the property to verify whether it has the right energy.
Confirm the purchase price and closing costs responsibilities
A purchase agreement outlines the money exchanged in the home sale. Review these numbers carefully before you sign:
Purchase price: This is the total value a buyer offers to purchase your home.
Earnest money: Also called a “good faith deposit,” this amount shows how serious a buyer is about their offer. If a buyer walks away from the deal, they’ll lose this deposit. Typically, an earnest money deposit (EMD) is 1% to 3% of the total purchase price, although it can increase to 10% in more competitive conditions.
Down payment: Most buyers require a mortgage loan to afford a home purchase, but the down payment is the percentage of the purchase a buyer pays up-front and out-of-pocket.
A larger down payment often indicates lower risk to a seller. Should the buyer encounter any last-minute financing snags, the seller has good reason to assume the buyer can cover the shortfall.
Escalation clauses: In a competitive market, sellers are more likely to see an addendum to some purchase agreements called an escalation clause. This clause indicates that a buyer will pay more for the property if there are better offers on the table.
For instance, a buyer may offer $375,000 with an escalation clause that increases the offer to $2,000 above any competing offer. Usually, escalation clauses include a price cap indicating the highest possible offer.
Cummings recalls a time when fierce buyer competition drove aggressive escalation clauses. “With multiple offers, we [we]re seeing a lot of buyers offer full price and then have an escalation clause that goes [$40,000] or $50,000 over the asking price.”
Closing costs: The purchase agreement dictates who is responsible for which closing costs. Closing costs include insurance premiums and fees, commissions, property taxes, and more. Buyers’ closing costs typically amount to 2% to 5% of the final sale price, but sellers can pay anywhere from 6% to 10%.
Depending on your market, it’s customary for sellers and buyers to cover certain closing costs while others are up for negotiation. The buyer typically pays for the inspection and appraisal, for instance, while the seller traditionally covers the real estate agents’ commissions.
Closely review the closing deadline
The closing date depends on several factors, including when a seller can move to their new home and when the lender can process the loan for the new homeowner.
The closing date is also sometimes referred to as the possession date, indicating the day a buyer takes possession of a home, but the two are not always synonymous. Some closings experience delays, so it’s in a seller’s best interest to prepare for a hiccup or two.
“Buyers, of course, want possession at closing,” Cummings says, but “we try to negotiate for our sellers at least a few days to move out after the closing, in case there is an issue.”
Most parties schedule the closing date 30 to 45 days after signing the purchase agreement. Always discuss the closing date with your agent to ensure the closing timeline is realistic.
Understand how the buyer intends to pay
Financing issues are the number one cause of closing delays, so sellers should carefully evaluate a buyer’s financial strength before accepting an offer.
Most buyers include a pre-approval letter with their offer to assure the seller that their finances are sound. When possible, buyers also make hefty down payments, which increases the likelihood that a home sale will proceed on schedule.
“The buyers [who] win in multiple offer situations [put] at least 20% down, sometimes 50%, or sometimes cash,” Cummings says. “In a normal market, you’ll have people doing more FHA, VA, and insured conventional loans.”
Scan for any special requests
Keep an eye out for additional buyer requests. For instance, a buyer may ask that you include specific appliances or furniture in the sale. Some buyers may even request to verify that the home is not “haunted.”
“In our contracts, there’s a ‘further conditions’ line — extra room for somebody asking for the house to be professionally cleaned before closing,” Cummings says, adding that any kind of request can be added here.
