Backup Contract Gives Seller a Second Chance

QUESTION: We signed a contract to sell our house about 30 days ago. The contract gives the purchasers 45 days to obtain financing or they can withdraw from the deal and get their deposit money back. We are extremely nervous that the purchasers will not be able to qualify for a loan, despite the assurances of our real estate agent. We are primarily concerned that our house may not appraise for the selling price.

We have heard that sellers can take additional contracts, just in case the original contract fails. Can you explain how this works?

ANSWER: You are referring to a “backup contract,” which has become very common in the buying and selling of real estate.

To have a binding contract for the sale of real estate, the law requires a written document that spells out all of the terms of the sale.

Included are the sales price, the date of settlement and any contingencies that may defeat the validity of the contract.

The written document has many names, ranging from “real estate sales agreement” to “purchase contract.”

The legal requirements to have a binding contract are that there be an offer, an acceptance and “valuable consideration.” These are the principal elements required for any contract.

Generally speaking, a buyer who likes a house presents a written offer to the seller. The seller has three options. The offer can be accepted in its entirety, rejected or counteroffered. When the offer is finally accepted, and there is consideration for the transaction, a valid, binding contract exists.

Consideration need not be money. Although the deposit that the purchaser puts down with the contract is sufficient consideration for legal purposes, the courts have also held that when the seller takes the house off the market for a period of time in reliance on the contract, this too is “valuable consideration.”

Once a contract has been signed, the seller must adhere to its terms. Few buyers are able to come up with all cash to purchase their house. They must seek financing, and have a financing contingency giving them a reasonable period of time (usually between 45 and 60 days) to find the money. If the buyer cannot get financing, the transaction (contract) is null and void, and the deposit should be returned to the buyer.

In today’s economic climate, there is one additional problem that buyers are discovering, namely that the house they want to buy is appraised at less than the sales price. Often, this can also be a barrier to a buyer obtaining the necessary mortgage financing. Obviously, none of this helps you as the seller. As you have indicated, you are getting nervous as the end of the 45 days draws near. If the purchaser is unable to get financing, the deal is off and you are still without a buyer.

You have the right to take backup contracts. I have always recommended that sellers continue to market their house even after they have found a buyer who has signed a contract, until all financing and other contingencies are removed. There always remains the possibility that the buyer can legally back away from the contract.

However, if you find a second purchaser who is prepared to sign a contract, you must qualify that written document to reflect that the second purchaser is in a backup status.

It is recommended that you place the following language in any backup contract:

“This contract will not become binding on the parties until the seller notifies the buyer in writing that the contract has been accepted. It is clearly understood that this is a backup contract, contingent on the voiding of an earlier contract to purchase.”

Not all potential purchasers will be willing to sign a backup contract. After all, they too will be in a state of limbo until they are notified by you, the seller, that they have now jumped into first priority position. However, some buyers may be willing to sign a backup contract, and this may give you the reasonable protections you are seeking.

Kass is a Washington lawyer and newspaper columnist specializing in real estate and tax matters. While questions cannot be answered individually, those of general interest will be addressed in this column. Questions and comments may be sent to Kass at 1050 17th St. N.W., Suite 1100, Washington, D.C. 20036.