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Friday, June 25, 2004

Addenda Make Contracts Complete

by M. Anthony Carr

A sales contract is usually a complete form in and of itself, however, you will find that rare is the case where 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 a plethora of issues, such as financing contingencies, purchase home of choice and home sale clauses, government-required addenda and disclosures. These are a few of the addenda you may find attached to the contract you will either write as a buyer or receive as a seller.

The popularity of a particular addenda will alter, depending on the state of the market. For instance, in a buyers' 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 sellers' market, this contingency is nearly nonexistent.

While there is no national standard or list of available contingencies, each region will offer various addenda to alter the established contract of the area. Below are commonly used addenda you may find at the end of your regional contract:

Home of choice clause: In a sellers' 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," then 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 buyers' market. In essence, the contract for the new house is contingent on the buyer being able to sell his or her current house.

Appraisal contingency: This is a good contingency in a sellers' market that can really protect both the buyer and the seller. The appraisal contingency assures that the buyer is not over paying 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, then 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 ups the down payment;

The buyer comes up with enough down payment to meet the contract price;

The seller drops the price to the appraisal amount; or, finally,

The contract falls out completely.
Escalation clause: buyers caught in a sellers' market will use this addenda 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 allows their 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 in tow, 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, airport location disclosures and more and more and more.

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

Published: June 25, 2004

Mr. Carr has covered real estate for more than 15 years. He is authoring “Street Guide to Real Estate,” due out 2004 through www.AmacomBooks.org. He can be reached via email at manthonycarr@erols.com.

Copyright © 2004 Realty Times. All Rights Reserved.

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