If you’re selling your home, you probably already know about most of the necessary steps, like receiving and accepting offers and drafting your purchase agreement. But you should also know about the different addenda that a buyer might request.
An addendum is an additional document that’s added to a purchase and sales contract. Sellers and buyers can add addenda to the purchase agreement, and both parties must agree to the addenda before signing this legally binding contract.
We spoke with two top real estate agents to help decipher some of the most common types of contract addenda.
1. Buyer contingencies addenda
Buyer contingencies are the most common addenda, according to Justin Ostow, a top real estate agent in Tampa, Florida, who completes 10% more sales than the average agent.
Contingencies dictate certain conditions which must be met for the contract to go through. For example, a buyer might request that the well be inspected and repaired before closing the sale.
Here are a few types of buyer contingency addenda you may encounter in an offer:
Sometimes called a due diligence contingency, an inspection contingency addendum allows the buyer to back out of the contract if the home inspection does not come back as expected. The buyer may request the seller to complete necessary repairs or offer money to cover the repairs. If the seller refuses, this addendum gives the buyer the right to terminate the contract with their earnest money intact.
Ostow says that if the buyer has accepted the property after the inspection, he will add an addendum that releases the inspection contingency to serve as an official record.
“It’s not a formal addendum … but most agents have one drawn up that just says the buyer accepts the property in its current condition and hereby releases the inspection contingency of the contract,” Ostow notes.
If the buyer forgoes the inspections altogether, the seller should include a property condition disclosure that declares the buyer accepts the property as-is. More and more buyers are opting to waive inspections in today’s hot seller’s market.
Like an inspection contingency, an appraisal contingency allows the buyer to exit the deal if the appraisal comes back at a lesser value than the purchase price. This addendum protects buyers from overpaying for homes and getting trapped in a contract for a home they can’t afford (a lender won’t approve a mortgage for more than a property is worth).
Ostow points out that this contingency is less common in a seller’s market where more buyers pay for homes in cash to beat the competition:
“It’s not as popular now because a lot of buyers are foregoing the appraisal, or at least they’ll come up with the difference if the appraisal doesn’t come in at the contract price.”
This type of addendum is also known as a mortgage contingency. It protects the buyer in the case they cannot secure financing from a lender. Most financing contingency addenda include a time frame during which the buyer must secure financing. If the buyer fails to do so, they can collect their earnest money and leave the deal.
There are specific addenda for buyers financing their homes through government loans from the Federal Housing Administration (FHA) or Veterans Affairs (VA). Because these loans usually have particular terms and requirements that the buyer must meet before approval, they also require different addenda than a conventional mortgage would.
Home sale contingency
If a buyer is selling their home simultaneously, a home sale contingency addendum states that they will purchase the seller’s home if and only if their home sells first. This addendum gives the buyer some leeway in settling their old property and financing their new one. Similar to the financing contingency, the addendum will state a specific time frame for the buyer to sell their home and go through with the purchase agreement for the new home.
Home sale contingencies are more prevalent during a buyer’s market where buyers have more leverage in negotiating the terms of the sale.
2. Escalation clause addendum
A buyer can add an escalation clause to automatically increase their offer amount to a stated dollar figure above the highest competing bid. Typically the addendum includes a cap, the maximum amount above the buyer’s current bid they are willing to offer. The addendum should also state that the buyer can request documented proof of any other offers the sellers claim to have received.
3. Known hazards addendum
In most cases, you must disclose any known hazards on your property to your buyer. Your buyer should sign a known hazards disclosure acknowledging that they accept the property as-is with those hazards. Alternatively, you can attach a document that details terms for you as the seller to remove such known hazards before the sale closes.
Hazards can include:
- Lead-based paint
- Buried gasoline or oil tank
- Mold and water damage
4. Special circumstances addenda
Unique market conditions and unprecedented events may necessitate special real estate addenda.
For example, coronavirus addenda were popular at the beginning and height of the COVID-19 pandemic though they have largely gone out of use, according to Ostow.
Generally, these clauses allowed the buyer and seller to leave the sale without repercussions if they experienced problems due to the COVID-19 pandemic. For example, a party could exit the contract if they fell ill or lost their job. Some Coronavirus addenda extended the closing date to accommodate the extra time it took to conduct closing virtually, says Tom Franceschina, top real estate agent in Columbia, South Carolina.
“I had seen a couple of addenda just saying our usual contract has to close within five days of the original closing date … because every time you extend the closing date, you have to get an addendum,” he comments.
5. Closing date extension addendum
Real estate agents can write closing date extensions in an addendum to cover a slew of circumstances, like a buyer needing to sell their house or a seller needing to resolve title issues.
6. Water well and septic addenda
Depending on the location of your property, you might need a water well or septic addendum. If you’re selling a property with a private well, this addendum can make the sale of the house contingent on an official potability test. The addendum should also clearly state the timeframe in which the inspection needs to happen. You may choose to pay for this test, or the buyer can.
If you’re selling a property with a septic system, the buyer may tack a septic addendum to the purchase agreement that requires you to conduct a septic tank inspection and provide them with a maintenance contract. Your agent can draft the addendum to state that the buyer is responsible for coordinating and paying for the inspection.
7. Flood insurance addendum
In areas with high risks of flooding, a seller or buyer may include a flood insurance addendum. This insurance addendum allows the buyer to back out of the contract if their flood insurance is quoted over a certain amount. Ostow adds that this real estate addendum protects buyers from high premiums, which are common as insurance rates are on the rise.
“They have to get insurance to be able to close on the house,” Ostow says. “So I want to make sure that they don’t have to pay $10,000 a year for flood insurance on a home that costs $500,000.”
While some states might put the onus on the buyer to seek out the flood insurance addendum, Rhode Island legally requires sellers to include it. Check with your agent to see what the laws are in your state.
8. Homeowners association addendum
If your home is part of a homeowners or condominium association, an HOA addendum provides the buyer with relevant member information. The addendum should include a date by which the buyer will receive the association’s rules, contracts, and financial information.
9. Estoppel certificate addendum
This addendum is only necessary if you’re selling a rental property with an existing tenant and the buyer wants to verify the current leases on the property. All parties, including the current lessees, must sign this document to verify current leases and rental income.
10. Seller financing addendum
In the rare case that you, as the seller, are providing your buyer a mortgage, you’ll need a seller financing addendum to your contract. This document gives you a chance to outline all of your terms to protect yourself and your finances. You should also include loan default terms and consequences. If you’re the lender in the transaction, consider adding a real estate lawyer to your team. Lawyers can help write or edit addenda to your contract.
11. Post-occupancy addendum
If you’ve received offers on your house but you don’t have anywhere to go, a post-occupancy addendum is useful. Especially helpful in a seller’s market where buying is increasingly difficult, this addendum allows the seller to specify a moving timeline after the closing date. A seller may also detail this agreement directly in the purchase agreement.
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