Back in the day, home sale contingent contracts was one way that homes sold when the purchaser also had a home to sell. They would make an offer, contingent on their home selling in a reasonable about of time, and then proceed to market their home aggressively to make the sale happen. This was a win-win scenario for the Seller homeowner too as it gave them time to shop for their next home while waiting for their buyer to receive an offer on their home. It was a golden-age for sure. However, home sales contingent on anything aside from mortgage financing became the norm, home sale contingencies became the evil step children of the real estate world. In the past, I’ve written how poorly written the North Carolina Contingent Sale Addendum is and it’s still bad. As a result, equity vulture investors have swooped in, offering to purchase homes for less than market value and with high fees, to eliminate the potential of a Owner/Seller having to sell their home without having first secured their next home.
However, it doesn’t have to be this way at all.
First, the mortgage market is responding, by bringing back Bridge Loan products, which allows a buyer to purchase their next home regardless of if their current home sells. This works great if the purchaser has a lot of equity in their home and really good credit. Still, there’s an easier solution that has been ignored but works really well in other states: the Contingent Sale Kick-Out Clause.
Now, if you mention in North or South Carolina that you once sold real estate in another place and they do something better, you get a collective eye-roll. As the Florida housing market was collapsing in the mid-2000’s, many real estate agents made their way to the Carolinas and shared their opinions on how backwards and arcane our real estate procedures are. I hope this doesn’t elicit the same type of response because I believe I’m on to something here.
In Maryland, we had a 72-hour kick out clause that was associated with contingent sale contracts. Essentially, a Seller could continue to market their property for sale after it has received a contingent on home sale contract. If a buyer came along and made an offer that the Seller found acceptable, they would have to notify their contingent sale buyer that they would have 72 hours to remove their contingency. If the home sale contingent buyer couldn’t do that, they would be kicked out of the deal. An easier way to think about it: the contingent buyer would have the right of first refusal if another deal came in.
It worked reasonably well because the Seller could continue to market their home for sale and the contingent Buyer was incentivized to market their home aggressively to produce a sale quickly to not get kicked out of the deal. Sure, things could happen and the entire house of cards could come tumbling down but that was less likely if everyone involved was completing their proper due diligence with their lenders, etc.
So how would this work in North Carolina?
North Carolina is famous or infamous around the country for our Due Diligence contracts whereby there are no contingencies at all. All of the usual contingency items, such as home inspection and mortgage, are wrapped up in one long period and it’s caveat emptor for the buyer. However, this style of contract is PERFECT for a kick-out clause. Walk through this with me:
Let’s say Steve finds the perfect house for sale in Huntersville which house is owned by Mary. The home is new to the market and Steve would like to make an offer but he has a home in NoDa that he will need to sell in order to use the equity from his home to purchase the new one. He likes the home so much that he’s willing to offer a $1,000 due diligence deposit and makes a competitive offer. Mary accepts Steve’s deal, deposits his $1000 Due Diligence check while Steve attempts to market his property. It’s in NoDa and the market is hot so it will sell quickly.
Mary can also continue to market the home for sale to prospective buyers while disclosing that she has a contingent offer on her property. If a new buyer makes an offer on Mary’s home, the new Buyer’s offer would contain a provision that would require that buyer to pay the same due diligence amount to the Mary as Steve did. The reason is that, if Steve is kicked out of the deal after a reasonable period of time, Steve wouldn’t be out $1000. He would be made whole and Mary is in the same place she was before. In either event, upon Mary’s receipt of a contingent offer, she would notify Steve that he had a period of time to either remove his contingency (he could obtain a bridge mortgage) or he would receive is $1000 due diligence fee back.
South Carolina uses a Kick Out Clause
Our neighbors to the south have a superior contingent sale addendum, which allows a Seller to continue to market a property after the home is under contract. The contingent buyer and seller agree upon a reasonable amount of time (not fixed to 72 hours like in Maryland) that the contingent buyer has to remove their contingency or risk getting kicked out.
While it would take the NCAR Forms Committee and NC Bar Association time to agree to a format that would work within our framework, something has to be done. The current method of dealing with contingent home sale purchasers is flawed and maybe it’s time we look at an alternative.