Many moons ago I wrote a riveting piece on a confusing little contract known as the California Association of Realtors “Contingency for Sale or Purchase of Other Property,” or as we like to call it when we are talking shop (which is pretty much all the time), the “CAR Form COP.”
I have found in my travels that most people don’t understand this form – and by “most people,” I am talking about real estate agents. If you took a logic class in college, the corollary is that because most agents don’t understand this document, their clients therefore do not.
Most times when we throw the COP into play, it involves a buyer who needs to sell their house before they can consummate the purchase of another. Every once in a while, however, we see this form used when the seller needs to purchase another home before closing the sale of their current residence. It’s the B-side of the Chicken and the Egg record, and it is that situation that I will tackle this morning.
Before I continue with my lecture series on “Boring Stuff About Contracts,” I will begin by republishing the requisite 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 another state or even a foreign country – like Texas, not an attorney.
With that out of the way, here’s the deal. You want a home, but not just any home. You want a home that is not the one you currently own. And if you are like must of us, you can only have one at a time. This is because lenders today have stupid rules that say you must have sufficient, documented earnings to service the debt on your real estate portfolio. That and, unlike the early part of the past decade, they now require things called “down payments,” and chances are that your down payment currently goes by the name of “home equity.”
The idea of the COP as it relates to the contingency of purchase is that it puts the parties on notice that your sale is contingent on your finding a replacement home. It is a form that minimizes your risk as a contingent seller. Note I said “minimizes.” You cannot eliminate all risk in a real estate transaction. Never. Accept it. That’s life.
There is risk in everything we do. I put myself at risk when I back through the garage door each morning (sadly, I do mean “through”). It is no different when selling a home. Our job as agents is to do everything we can to mitigate the risks, but they still exist.
That being said, here is what Part B of the COP looks like — the part that pertains to sellers.
First the facts:
1. Agreement is contingent on Seller entering a contract to acquire replacement property – Fair enough. That’s the point. So far, so good.
2. Seller shall, within (X) Days After Acceptance, remove this contingency or cancel the agreement – The “spirit” of this clause is that once the seller has negotiated an accepted offer on the sale of their current home, the buyer will allow them a period of time to go out and both identify and secure (enter contract on) another. If within timeframes they are unable to accomplish this, either party may cancel.
3. Time periods in the Agreement… shall begin – Time periods can begin per the contract between the buyer and seller (upon acceptance of the offer on the sale of the current home), upon delivery by the seller of removal of the COP, or at some other agreed upon date. Typically it is upon removal of the COP. This is intended to protect the buyer who, when that egg timer starts, will start spending money – on things like appraisals and inspections. No buyer wants to be out $1000 or more just to later learn that the seller won’t be selling after all.
Buyer and Seller agree that…. Seller may extend the Close of Escrow Date – This clause recognizes the need to coordinate the timing of the two transactions. Call it the “wiggle room” clause. The first agreement on the sale of the sellers current home may specify a 30-closing or even a fixed date to close, but the seller might only be able to negotiate a 45-day closing on the up-leg and, of course, it took them a little time to get from Point A to Point B, so adjustments may be necessary.
4. Even after expiration of the time specified in B2, Seller retains, until Buyer cancels… the right to remove in writing this contingency or cancel the Agreement – This is a hat tip to our “active” method of contingency removals. Unless it is in writing, the contingency remains in effect.
All that sounds easy enough, but here is where the risk comes in play.
Done properly (see #3 above), the buyer upon execution of the agreement is left sitting in a holding pattern until and if the seller finds their new digs. They won’t commence the money spending or the investigation process until the contingency is removed. The good news is they know what they’ve got, at least in terms of price and terms; the bad news is they may ultimately find they’ve got nothing at all.
This is where many sellers get confused. Say you find your new home, open your escrows, and remove this contingency. There are a lot of “what ifs.” What if you find during inspections that your replacement home is built on an ancient burial ground or an extended family of very healthy raccoons has taken up residence in the cracks in the slab? What if you find out Phoenix is in the desert or the Windy City is aptly named and you don’t want to go there anymore? You likely can cancel that contract on your purchase, but you can’t cancel the first sale. That would constitute a breach. In other words, you have sold your home.
Because of this potential bugaboo, we see many agents write in something to the effect of “Sale to be contingent on concurrent closing of seller’s home of choice.” Now, let’s put on the buyer’s hat and think about this one. This means that the seller could get 44 days into your 45-day escrow and change their mind. You, the buyer, have spent money, spent time, packed your belongings and enrolled your children in their new school. You are now camping out on the living room floor eating Chinese take-out off of old pizza boxes. It’s not a pretty picture.
And let’s talk about “concurrent closings.” We recently had a situation where a listing agent and the seller were demanding a concurrent closing provision. In our case, the seller was selling a San Diego home and intending to purchase another home in Florida. In this case, concurrent closings are impossible, unless of course you can find a way to violate the time-space continuum. It takes time for wire transfers, recording schedules and procedures are different, and one pile of money has to hit the Title company’s account before it can be routed it’s final destination. A good rule of thumb for interstate closings is a two-day gap.
What about two closings within the same county? That can happen concurrently, but it requires the same Title company on both legs of the transaction and some heavy-lifting coordination on the part of Escrow and the agents. It also requires that the lender of the up-leg play ball and be willing to fund the loan without a final settlement statement on the down-leg. Different Title companies means that money has to move between accounts, and you are back to sequential, not concurrent, events.
As a bit of an aside, our transaction with the Florida-bound seller didn’t work out. It was for a variety of reasons, but all were related to her insistence that the transaction involve zero risk to her. There is no such thing. Or rather, had we conceded and allowed for concurrent closings which could never happen in real-life land, a three-month escrow, and a five-day period for the seller to remain in possession without a rent-back agreement (the agent said he never used those and wouldn’t in our case), we would have put our buyer client at enormous risk.
The bottom line is that transactions involving the moving parts of a COP are tricky. If you are a buyer or seller with another home hanging in the balance, make sure your agent properly explains the risks and protects your interests to the extent they are able. And if you are really committed to a move up, down or out, a short-term rental may be an option worth considering.