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Wednesday Mar 25, 2015

'Back-up offers becoming commonplace'

Back-up offers are becoming commonplace, said Carol Reynolds, Pam Golding Properties area principal in Durban, Durban North and La Lucia.

"From a seller's perspective, having a back-up offer is a wonderful contingency plan, as, in the event of the first offer falling away, a second offer is safely in place.

"From a buyer's perspective, there are a number of factors to take into consideration - the most obvious being that a back-up offer, as the name suggests, is a secondary offer that will only become enforceable if the first offer lapses or is cancelled. As a result, the second buyer is essentially second-inqueue, and has no claim to the property unless the first sale falls away."

Reynolds said there were two primary scenarios where back-up offers came into play. In the first scenario a suspensive sale is conditional on the sale of another property. In this instance, the sale agreement needs to iron out all the steps that should be followed in the event of the seller receiving another offer before the first buyer fulfils the suspensive conditions.

"Where a back-up offer is signed before the first buyer fulfils the suspensive conditions, the back-up buyer cannot place the first buyer on notice, until the back-up offer is fully secure. In other words, the back-up offer can only put the first offer in jeopardy when the back-up buyer has paid a cash deposit and has secured bond approval. Until the second purchase price is fully secure, the first offer continues to follow its course.

"Once the second offer is secure, then the seller is entitled to place the first buyer on notice. Most sale agreements will have a clause that affords the first buyer a reasonable time within which to waive the suspensive condition and make his offer unconditional, to avoid losing the sale.

"So, if the seller places the first buyer on notice, then the first buyer will have seven days (or a reasonable time) to make his offer entirely unconditional. If the first buyer is unable to waive the suspensive conditions within the specified time, then his sale falls away and the back-up offer becomes enforceable.

"This whole process can be extremely stressful for the first buyer, and this is one of the reasons that most agents will advise their clients to sell before they buy, as opposed to buying before they sell, so that they are cash and bond buyers rather than subject-to-sale buyers.

"Being a subject- to- sale buyer also reduces your bargaining power."

Reynolds said the second situation arose when the first offer didn't depend on the sale of another property, but instead is a cash and bond offer. In this instance, the back-up buyer cannot place the first buyer on notice. The back-up buyer simply has to wait for the bond clause to be timeously fulfilled by the first buyer. The back-up offer should stipulate that the seller won't be entitled to grant any extensions of time to the first buyer, so that all parties are aware of the timeframes within which the bond condition needs to be fulfilled.

"It's important to note that in terms of the Estate Agents' Code of Conduct, agents need to act for their sellers without prejudice to their buyers. As soon as two buyers are competing, one buyer cannot be prejudiced by the agent or seller granting an extension of time in favour of the other buyer.

"If the first buyer is unable to either obtain a bond as agreed within the stipulated period, or should he be unable to waive the bond condition, then the first offer will lapse, and the back-up offer will become the primary offer and shall become enforceable.

"Sometimes, the back-up buyer is also waiting for bond approval, and the seller may meanwhile receive a second back-up offer, which then sits in the wings, waiting to see whether the offer in play will work or not. Again, if the buyer fails to obtain his bond within the specified period, then the back-up offer will become effective," she said.

Some estate agencies have sale agreements with a built-in extension of time for the bond. In other words, the agreement will have a clause stating that if the buyer does not obtain his bond in the stipulated time period, the seller will automatically grant him another 30 or 60 days within which to get his finance approved.

"It is imperative that agents from these companies inform their sellers of this clause, as failure to do so can result in the seller being tied into the first offer for a long time without his knowledge, leaving him at risk of losing back-up offers as most buyers are not prepared to wait around for such extensive periods.

"We have had sellers approach us with agreements like this and they have been most upset, as they were not aware of the automatic extension of time.

"Buyers should do their best to get themselves qualified for finance before they go house-hunting, so that they are not placed in the stressful situation of losing the opportunity to acquire a home."

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