How release clauses, backup offers work
By Dian Hymer,
Convincing a seller to accept an offer that's contingent on the sale of another property can be challenging. The odds of acceptance improve if the offer is structured to the mutual benefit of both buyers and sellers.
From the buyers' perspective, there are advantages and disadvantages to contingent sale offers. A big advantage is that the buyers don't have to go through with the purchase if their home doesn't sell. They don't risk much.
The buyers may incur costs of inspecting and appraising the property, but the expense is minimal compared to buying a new home before selling the old one and ending up owning two homes at once.
From the sellers' point of view, contingent sale offers are not desirable because the outcome is uncertain. This is why sellers who agree to a contingent sale offer usually want a release clause in the contract.
A release clause allows sellers to continue to market their home and accept other offers in backup position, subject to the collapse of the primary offer. If the first buyers can't perform, they have to withdraw from the contract so that the seller can proceed with backup offer.
Buyers can spend a lot of time finding the right house to buy. If they can't sell their current home before another buyer boots them out of contract, they have to start house hunting again.
HO-- -- USE HUNTING TIP: A contingent sale offer can be structured to give buyers more certainty about being able to close the deal. Normally, when there is a release in a contingent sale offer, it goes into effect as soon as the contract is ratified. But it doesn't necessarily have to go into effect then.
Buyers can request that the release clause not go into effect for a period of time, say 14 to 21 or so days. If the buyers' home is ready to be put on the market and it's priced right and well located, there's a chance it will be under contract before the release clause goes into effect.
A release clause that doesn't go into effect immediately should specify that if the buyers' property is under contract within the specified time frame, the release clause will not go into effect unless that deal were to fall apart.
Sellers might think this approach benefits only the buyers. However, it can benefit the sellers in terms of their overall marketing strategy.
When sellers of a property that's listed on the Multiple Listing Service (MLS) accept a contingent sale offer with a release clause, this information is published in the MLS. It is a material fact affecting the sale. A buyer can make an offer only for a backup position. Many buyers don't want to waste their time.
So, a release clause can slow down the marketing of the sellers' property. And, it can be difficult to regenerate enthusiasm about the property if the buyers' property doesn't sell and the sellers' listing is still encumbered by a release clause.
The sellers' property will show up as pending in the MLS if the buyers and sellers agree to delay the activation of the release clause. If the buyers' property doesn't sell by the end of the specified time period, the sellers' property will show up in the MLS as back on the market. This quickly and clearly announces that the listing is available for sale with no strings attached.
THE CLOSING: Make sure your agent includes in the confidential MLS remarks to agents that the listing is back on the market because the buyers' home didn't sell, and due to no fault of the listing.