- The Washington Times - Thursday, June 24, 2004

A sales contract is usually a complete form, but rare is the case in which the contract is complete in and of itself.

The buyer will write a contract with addenda attached. These “extra” parts of the contract can cover many issues, such as financing contingencies, purchase home of choice and home-sale clauses, government-required addenda and disclosures.

The popularity of a particular addendum will shift depending on the state of the market. For instance, in a buyer’s market, purchasers will regularly call for a home-inspection contingency, meaning the property must pass a satisfactory home inspection before the contract is ratified. During a seller’s market, this contingency is nearly nonexistent.

There is no national standard or list of available contingencies. Listed here are commonly used addenda you may find at the end of your regional contract:

• Home-of-choice (HOC) clause: In a seller’s market, this a great tool to make sure you can find a house you want to move into before giving up the keys to your current home. When sellers tell me they are afraid to put their home on the market because they “don’t know where I would move,” the HOC clause protects them from having to move into a property they don’t like just so they can sell their house at the top of the market.

• Home-sale clause: This is the opposite of the above clause and works best in a buyer’s market. In essence, the contract for the new house is contingent on the buyer’s being able to sell his or her current house.

• Appraisal contingency: This is a good contingency in a seller’s market that can protect both the buyer and the seller. The appraisal contingency assures that the buyer is not overpaying for the property, and the seller is assured the transaction will go to settlement in an inflated sales-price environment.

If the house appraises for less than the contract price, the buyer and seller have several options: Renegotiate the price to meet the amount the bank will finance; meet in the middle — the seller drops the price and the buyer increases the down payment; have the buyer come up with enough down payment to meet the contract price; have the seller drop the price to the appraisal amount; or, finally, let the contract fall out.

• Escalation clause: Buyers caught in a seller’s market will use this addendum to assure they can outbid the competition. They will agree to pay more than any other contract up to a pre-agreed amount. For instance, the contract may be for $200,000, but the escalation clause might allow the buyer agent to offer $1,000 higher than the highest contract, but not to surpass a $225,000 sales price.

• Financing contingency: Most contracts come with an approval letter attached; however, some contracts can require that the buyer be able to obtain financing for the house before the contract is ratified.

• Government-required addenda: There will be plenty of required addenda to a contract depending on your jurisdiction. For houses built before 1978, for instance, there will be a federally required disclosure of lead-based paint information. Other government-mandated addenda may include property disclaimer/disclosure, coastal-area disclosures and airport location disclosures.

Scores of other addenda can be added to your sales contract, but to avoid being taken by surprise, discuss these addenda with your real estate professional before you move into the contract-writing stage of your home purchase.

M. Anthony Carr has written about real estate for more than 15 years. Contact him by e-mail ([email protected]).

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