Join me as we take another trip through Boring Land and dive into the mysteries of arguably the most confusing and oft-misunderstood contracts in our arsenal – the Contingency for Sale or Purchase of Other Property or, as we playfully call it, the COP.
As always, I will begin my blathering about contracts with the proper disclaimer: Not an attorney, not an attorney, never went to law school, don’t want to be sued, just an agent, just an agent in California, my contracts are meaningless to you if you live in Kennebunkport, not an attorney.
Timing the purchase of a home when you’ve already got one of those things is an age-old conundrum. Do I buy first? Do I sell first? Or, can I do both at once while avoiding an extended stay at the Residence Inn or in my agent’s guest room?
As I discussed in a recent article for HGTV’s FrontDoor, the answer really depends on your circumstances. Orchestrating a seamless move where two transactions, a sale and a purchase, are involved is a challenge. The result can be a glorious concerto of perfectly timed movement or it end up sounding a lot like the opening act for Limp Bizkit. Fortunately, it can be done. The planets have to align, and your agent has to be at the top of their game. We are involved in two such situations right now which, by all accounts, appear to be headed toward happy endings, and we will begin breathing again only when the County Recorder tells us we may.
The reality of our market is that the down leg, the sale of your current home, should ideally occur first. Skinning the beast from this angle, however, is not for the timid. Even if you are able to buy time in the contract, through a rent-back or a longer escrow period, there will be risk — risk that the perfect replacement home won’t reveal itself in time. So, for those prone toward caution, we have the COP.
The COP actually tackles this issue from both directions. It allows for an offer to be submitted contingent on the sale of the buyer’s home, and it allows for an offer to be accepted contingent on the seller purchasing a new home. It’s the former which is typically the source of glazed eyes and my topic du jour.
If a seller accepts an offer contingent on the sale of the buyer’s home, the COP gives the seller up to three opportunities to cancel the agreement. So hang on and let the hilarity ensue.
Situation #1 – Close of escrow
First, the COP will identify the buyer’s property which may or may not be listed for sale, and may or may not be in escrow. Next, the parties will agree to a drop dead date by which if the buyer’s home hasn’t closed escrow, either party may cancel. Usually we see the buyer’s agent filling in a date two or three or more months out if the buyer’s home is not under contract; if it is, the date will usually coincide with their scheduled closing date.
That was fun. Now on to situation number two.
Situation #2 – Escrow Evidence
This is where it starts to get exciting. A buyer’s home will either not yet be in escrow (paragraph 2) or it will be in escrow (paragraph 3), which kind of falls under the heading of “duh.” It is paragraph 4 which includes the zinger, a zinger I so often see lost on the agents, because absent the elective check box, it applies regardless of the status of the property. Paragraph 4 partners with either paragraphs 2 or 3, depending which one applies. In other words, if a buyer’s home is in escrow, they have five days to prove it or the seller may cancel. More importantly, if the buyer’s home is not yet in escrow, it gives the seller the right to cancel if they don’t get it there within a certain period of time, the default being seventeen days. Clearly, seventeen days in this market is not overly generous or comfortable.
This provision is usually missed or misunderstood, because what everyone is really focusing on is the sexy, third situation.
Situation #3 – The “72-hour Clause”
The 72-hour clause, or what is called the “blow-out” clause in technical circles, doesn’t have to be 72 hours. It can 24 or 48 or any amount of time agreed to by the parties. If the provisions of paragraph 6(a) apply, then the seller may continue to offer the property for sale. It remains active in the MLS with the only requirement being (in our San Diego market) that the remarks reflect this “first right of refusal.”
What the 72-hour clause does is give the seller the opportunity to continue trolling for a better date, and notice that nowhere does the contract say that the better date must be a non-contingent offer. Further, unless otherwise agreed to, if a seller gives notice to the contingent buyer, there are some pretty serious catches. They have to demonstrate they have the funds and qualifications to close without selling their home, and they have to remove the loan contingency. A buyer who really needs to sell their home to purchase their next will not be able to ante up, so the 72-hour clause becomes a foot race.
As an alternative, the buyer can ask the seller to accept the provisions of paragraph 6(b), namely that the seller will take the home off the market for a period of time or for the duration of the agreement.
What is important to remember here is that nothing in this third scenario makes the provisions of the first two go away.
And, there you have it. The COP — the thrilling document that, pound for pound, is arguably the most confusing contract and the biggest cancellation mine field with which we must deal. Whether a buyer or seller, understanding every word of this little devil is essential.
Tomorrow, we will talk about the thrill of watching water boil.