Two Forms Can Protect Backup Offers

ORLANDO, Fla. – At last count, Florida Realtors® offers members over 300 forms to use in their day-to-day business. Some have become so widely used that nearly everyone recognizes them by name. Others are more obscure and needed less often.

Today, let’s refresh our memories:

To assist sellers in strong seller’s markets, Florida Realtors produces two forms that can allow the seller to, in effect, “have their cake and eat it too” by accepting the best offer but protecting themselves in case that offer falls through. Most members know about the Kick-Out Clause, addendum X to the FR/Bar and ASIS contracts. What many may not know, however, is that addendum X is designed to work in conjunction with addendum W, Back-Up Contract.  In fact, addendum X is used about twice as often as addendum W.

So how are these two addenda supposed to work together? Let’s say a seller receives multiple offers. Many of them are similar, but one stands head-and-shoulders above the rest. As many members know, however, some “best offers” turn out to be too good to be true. For example, a “no contingency cash” offer may in fact need to be financed or a buyer may need to sell their home to afford the purchase. The seller wants to accept this offer, but because they already have multiple other offers, they don’t want the hassle of putting their house back on the market if the blockbuster offer falls through. This is where addenda X and W are intended to work together.

Though it’s later in the alphabet, we start with addenda X, Kick-Out Clause. Addenda X provides that the seller will continue to have the right “to show the Property and … enter into bona fide back-up purchase contracts.”  If the seller enters into such a back-up contract, they then show it to the original buyer with the purchase price and buyer information redacted. The initial buyer then must make an additional “put up or shut up” deposit. In addition, the initial buyer agrees to waive all contingencies. So if the buyer is hiding financing or sale of other property, they will no longer be protected if the deal falls through and they will lose both their initial and second deposit. If the buyer fails to make that additional deposit, then that contract terminates, the buyer’s original deposit is returned  and the seller can move on to the next buyer in line. The first buyer’s bluff has in effect been called.

But we’re not finished with our analysis. As addendum X provides, the seller can continue marketing the property and entering into back-up contracts as they prefer. One practice tip — the seller may not choose to enter into the offer with the second highest price. Since they’ve already locked in one great offer, they are free to protect themselves by selecting a backup contract that seems most likely to close. Sellers can impose whatever conditions they like.

Once a seller has made a selection, that’s where addendum W comes in. The parties select a “drop dead” date, after which the buyer will no longer be obligated to purchase the property if the back-up goes into first position. This lets the back-up buyer know how long they will have to wait before they can start making other offers. However, addendum W also provides that if the back-up buyer chooses to walk away, they may terminate any time before the seller notifies them they are in first position.

If the initial contract falls through, and the back-up buyer is still committed, the seller then notifies the back-up buyer they are now in first position. Another important aspect of addendum W that members miss is that the Effective Date of the contract — from which all the time periods such as inspection period and earnest money deposit start to run — is the date the seller notifies the back-up buyer. Any original Effective Date that may be in the body of the contract is superseded by this language in addendum W.

So now the seller is all set. They have their “can’t miss” offer in first position, and addenda X and W protect them in case that “can’t miss” offer, in fact, misses. But there’s one more thing to consider. What if the seller wants to have more than one back-up offer?  Can addendum W be used with more than contract? Unfortunately, there is no language in addendum W that specifies whether there is more than one contract in position before the back-up.  If the seller wishes to use addendum W with more than one contract, they should contact an attorney to draft language in each back-up to establish which one(s) have priority. Members should avoid trying to draft language themselves that could end up obligating the seller with more than one back-up claiming second position.

One last thing: As with all addenda, make sure to check the boxes for W or X in paragraph 19 of the body of the contract so all parties are aware an addendum has been used. Don’t forget this important step.

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Richard Swank is an Associate General Counsel for Florida Realtors

Note: Information deemed accurate on date of publication

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