The Buyers Get Out Of Jail Free Card
Keeping the Transaction Together
One of the most critical services a REALTOR can provide, is the ability to "keep the deal together" until closing.
Many Buyers and Sellers believe that, once the contract is signed, it is a binding commitment on both parties and things will flow smoothly to the closing. This is not the case! In a Seller's market where prices are rising, Sellers may receive backup offers for higher price than the first contract they accepted, and are "chomping at the bit" to see the first contract fall through. In a Buyer's market, the Buyers may see another property that offers better value than the one they just wrote a contract on, and may find the way to get out, using any of the "Get Out Of Jail Free" contingency clauses to get out of the contract (such as financing, sale of a house, inspections, etc.)!
The South Carolina Association of REALTORS amended their standard contract in July, 2013 to include a "Due Diligence" period as an alternative to the traditional "Inspection and Repairs" contingency. Under the Due Diligence alternative, the Buyers can rescind (for ANY reason) the contract at any time before the Due Diligence Date, by notifying the Seller in writing and paying the "Due Diligence Fee". This is designed to level the playing field between Buyers and Sellers, avoiding contracts with one-sided clauses benefiting only one of the parties. Choosing the "Inspections and Repairs" option or the "Due Diligence" option becomes one of the choices of the contract that parties need to agree to.
After the Due Diligence period is over, the contract becomes an"As-Is" contract and the Buyer must proceed to closing subject only to loan approval.
As a listing agent, it is essential that all these contingency "cracks" are "tightened up" to protect the Seller in the event that the Buyers change their mind afterward.
1. The "Subject to Loan Approval" contingency
- what type of loan are they applying for (FHA, Conventional, VA)?
- Are the Buyers pre-approved (with documents reviewed) for this type of loan?
- Do they have verification of required funds to close?
- Monitor carefully the critical dates for loan application and approval. Buyers may forfeit their right to exercise a contingency if they don't do it within the specified date(s). The sooner the Buyers get their loan fully approved, the better.
- Is the contingency worded vaguely ("subject to loan approval at terms acceptable to Buyers")? Its wording must be clearly defined (i.e. what is "acceptable"?)
- Have the Buyers "locked in" their interest rate? With interest rates fluctuating like they are, it is possible than an upward shift may prevent the Buyers from qualifying for the amount, even if they were previously pre-qualified (at a lower interest rate)
2. The "Subject to Appraisal" contingency
Is there adequate time to conduct the appraisal and go through underwriting before the closing date? This contingency can get tricky if the market is changing: Appraisers are very conservative and may ignore market dynamics, especially if the market is "hot" and prices are rising rapidly.
3. The "Subject to Inspections & Repairs" contingency
- Monitor carefully the deadlines to conduct the Buyers inspections
- Make sure there is enough time between the deadline for the Buyer's Repair List and the closing, so that the Seller has enough time to get quotes and hire tradesmen to do the repairs before closing.
- Verify that all Repairs have been done properly and on time. Ask the Seller to keep records and invoices.
4. The "Due Diligence" contingency
- Make sure that the Due Diligence period is not too long
- Negotiate a Due Diligence Fee that truly represents opportunity cost for the Seller
- Track Due Diligence Date
Your listing agent must be experienced (at the contract negotiations stage), and on top of the game (during the contract-to-closing period) to ensure that all deadlines are met, that commitments are followed through and that all parties are performing their tasks, to avoid granting unnecessary "walking opportunities" to the Buyers in pursuit of another listing. Of course, it is at best difficult, (and most times impractical) to "force" the Buyer to perform against his/her will. But the more attention to detail, the better chances you will have that the transaction will close as planned!
Wish to sell your home? Give us a call at 843-900-0155.