How to avoid problems with contingent sales

The recent interest rate increases are not only affecting home buyers – they are also making home sellers more anxious and more inclined to accept contingent offers.

So says Gerhard Kotzé, MD of the RealNet estate agency group, who notes that although stock is still in short supply, especially in the most popular areas, repeat buyers eager to complete a purchase before rates rise again are making more offers that are contingent on being able to sell their existing homes.

“And sellers are responding by softening their stance on such offers, which would have had little chance of succeeding before the Reserve Bank began raising interest rates to try to keep a lid on inflation. At the start of the year, sellers were really only interested in “clean” offers from first-time buyers or repeat buyers who had already sold their own homes and had cash in hand.

“Now, they are themselves keen to be approved for new homes loans before the additional rate increases expected this year, and we are starting to see chains of transactions develop again, for the first time in several years.”

However, he says, both parties do need to take extra care when inserting or completing a sale contingency clause in a sale agreement. Home buyers, for example, must make sure that the clause specifically states how long they have to sell their properties – say 60 or 90 days - before they must choose to either waive the contingency or abandon the agreement.

“If the clause is not specific on this, the buyer could end up in deep financial trouble, liable to pay for two properties from the day the home loan for the new property is approved. That would be a frightening situation for most buyers, and could well drive a forced sale of the existing home for a much lower price than it is really worth."

The sales agreement should also clearly state, says Kotzé, that if the prospective buyers do fail to meet the deadline, it will be they who choose whether to waive the condition or to void the sale agreement, and not the property seller.

“On the other hand, the seller also needs to be sure that there is a specific date by which the buyer must fulfil this type of contingency – in the same way, that there is a specific date by which they must be approved for a home loan if they need one – or the agreement could become 'open-ended'. This would mean that they would be unable to sell to any other buyer as long as the contingent buyer was not in breach on any other point of their original sale agreement.

"Indeed, although contingent sales are becoming more commonplace again, they are not necessarily simple. Both buyers and sellers are thus well-advised to deal only with qualified and experienced estate agents who will ensure that their sale agreements are correctly drawn up."