While this isn’t ideal you can help your client (or perhaps yourself!) make good choices by being familiar with how this contingency works and your options going forward.
First of all, do you accept?
Here are a few items I like to consider:
Is the other property on the market? If it’s not even listed yet I might be hesitant to accept.
If listed, is it priced appropriately to get an offer asap? If not, I might discuss with buyer’s agent to find out if they are open to dropping price on the listing.
Is the other property under contract? Past Option Period? This is ideal and the safest bet when accepting this contingency.
Once a contingency offer is accepted you should change the MLS listing to ACTIVE-CONTINGENT. This will alert other buyer’s agents that you have accepted a contingency offer and let them know there is still possibility for a back up to be accepted. The drawback is that some agents will not show AC properties because the property is already under contract and they don’t want to mess with submitting a back-up. I would expect a listing with this designation to show less than an active listing.
However, let’s say that you DO get another offer on the property. How exactly does this work? This is one of the most frequent questions I get so let’s take a closer look at Sections B & C of the TAR-1908/TREC 10-6 Form ADDENDUM FOR SALE OF OTHER PROPERTY BY BUYER.
SECTION B: If Seller accepts a written offer to sell the Property, Seller shall notify Buyer (1) of such acceptance AND (2) that Seller requires Buyer to waive the Contingency. Buyer must waive the Contingency on or before the _______ day after Seller’s notice to Buyer; otherwise, the contract will terminate automatically and the earnest money will be refunded to Buyer.
Now, let’s break it down further so we know exactly how to proceed and cover all the necessary contractual items.
If Seller accepts a written offer to sell the Property If another offer is received and your seller wishes to accept the other offer they must go ahead and accept/execute the other offer including TAR 1909/TREC 11-7 Addendum for “Back Up” Contract.
Seller shall notify Buyer (1) of such acceptance AND (2) that Seller requires Buyer to waive the Contingency. To accomplish this, as listing agent, you will need to give notice to the buyer of the original offer by delivering TAR-1912 NOTICES REGARDING CONTINGENCY UNDER ADDENDUM FOR SALE OF OTHER PROPERTY BY BUYER.
Buyer must waive the Contingency on or before the _______ day after Seller’s notice to Buyer. The buyer now has the option to allow the contract to terminate OR they can waive the contingency within the allotted days. As a listing agent, I would encourage you to have made sure this is a few days as possible when accepting the contract initially. You don’t want things to be in limbo for 2 weeks! I would say 2-3 days would be an appropriate time frame. So, if the contract says 3 days and you give the notice on Monday then the buyer has until the end of the day on Thursday to waive the contingency.
otherwise, the contract will terminate automatically and the earnest money will be refunded to Buyer. If buyer allows the contract to terminate by not waiving the contingency you should prepare a Release of Earnest Money with earnest money being returned to buyer. Listing agent should then prepare an amendment for the Back Up Contract amending the effective date of the contract to reflect the date notice given to the back-up buyer that the first contract terminated.
Of course, the original buyer also has the option of waiving the contingency and that is addressed in Section C of the Addendum For Sale of Other Property:
SECTION C: Buyer may waive the Contingency only by notifying Seller of the waive and depositing $_______ with escrow agent as additional earnest money. All notices must be in writing and effective when delivered in accordance with the contract.
As listing agent, when negotiating the original offer, it is recommended to make the additional earnest money an amount significant enough to make it painful if the buyers are not able to perform. By waiving the contingency, they are remaining under contract and risking their earnest money if they ultimately can’t sell the other property and close on your listing. You do not want your property tied up under contract with little risk to the buyer for not performing…especially since you had a Back Up ready to go!
If the contract with the contingency stays in place you will need to prepare your seller’s for possible delays in closing since there are now many more moving parts to the transaction…the buyer’s buyer may be getting a loan which could get delayed, delaying your buyer’s ability to close. However, accepting an offer contingent on the sale of another property does allow the seller some flexibility in accepting a back-up offer and may be necessary in softer market.
If you have any questions, ask your broker!