Back-up offers in a changing property market

With the residential property market having turned, and given the stock shortages being experienced in many of the metropolitan areas, back-up offers are becoming common-place, says Carol Reynolds, Pam Golding Properties area principal in Durban, Durban North and La Lucia. She says it is therefore prudent to highlight the key components of the process involved in submitting back-up offers for both seller and buyer.

This spacious, recently renovated four bedroom home in central La Lucia, KwaZulu-Natal is marketed by Pam Golding Properties at R4.5 million. Spacious and with exquisite finishes, it includes three bathrooms, a fully fitted kitchen with Caesarstone tops, open plan lounge, dining and TV area which leads into a large enclosed veranda overlooking a pool and with sweeping sea views, as well as a large en suite guest room and double garage with automated access, and staff accommodation.

“From a seller’s perspective, having a back-up offer is a wonderful contingency plan and provides a great ‘insurance’ policy such that 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 upon the lapsing or cancellation of the first offer. As a result, the second purchaser is essentially second-in-queue, and has no claim to the property unless the first sale falls away.”

Reynolds says there are two primary scenarios where back-up offers come into play, both of which need to be dealt with in isolation. “The first scenario deals with a situation where the sale is a suspensive one, and is conditional upon 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 obtaining another offer prior to the first purchaser fulfilling his suspensive conditions.”

She says essentially, where a back-up offer is signed prior to the first purchaser fulfilling his suspensive conditions, the back-up purchaser cannot place the first purchaser on notice, until such time as 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 purchaser has paid his/her cash deposit and has secured bond approval. Until such time as 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 purchaser on notice. Most sale agreements will have a clause that affords the first purchaser a reasonable time within which to waive the suspensive condition and make his offer unconditional, so as to avoid losing the sale. Thus, if the seller places the first purchaser on notice, then the first purchaser will have seven days (or a reasonable time) to make his offer entirely unconditional. If the first purchaser is unable to waive the suspensive conditions within the specified time period, then his sale falls away and the back-up offer becomes enforceable.

“This whole process can be extremely stressful for the first purchaser, and this is one of the reasons that most agents will advise their clients to sell before they purchase, as opposed to purchasing 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 one’s bargaining power. On the whole, a seller is more likely to accept a clean offer with fewer conditions, and hence an A-grade buyer who is able to make an unconditional offer will more than likely be able to negotiate a better price for him- or herself.”

Reynolds says the second situation arises when the first offer is not suspensive upon the sale of another property, but instead is a cash and bond offer. In this instance, the back-up purchaser cannot place the first purchaser on notice. The back-up purchaser simply has to wait for the bond clause to be timeously fulfilled by the first purchaser. The back-up offer should stipulate that the seller shall not be entitled to grant any extensions of time to the first purchaser, so that all parties are aware of the time frames within which the bond condition needs to be fulfilled. It is 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.

Carol Reynolds, Pam Golding Properties area principal for Durban, Durban North and La Lucia.

“In the event that the first purchaser is unable to either obtain his bond as per the agreement within the stipulated period, or should her/she 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 purchaser is also waiting for bond approval, and in the interim, the seller may 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 purchaser fails to obtain his bond within the time period, then the back-up offer will become effective,” she says.

Adds Reynolds: “Some real estate companies 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 purchaser 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 lengthy period of time without his knowledge, leaving him at risk of losing back-up offers as most purchasers are not prepared to wait around for such extensive periods of time. 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.

“In this market, buyers should do their best to get themselves prequalified for finance, so that they are not placed in the very stressful situation of losing the opportunity to acquire a home that they have fallen in love with because they were unable to obtain finance within the stipulated time period.”

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