In early 2022, even the mention of an escape clause would have sellers laughing. But, in late 2023 the escape clause in real estate is back in full force. This blog will take us through what an escape clause is and how it’s executed Guelph real estate.
What is an escape clause?
An escape clause is used by a seller of a home to attempt to escape an accepted conditional offer. This is if they receive an offer they like better. Typical escape clauses use 24- 48 hours as a timeframe. It allows for the buyer to either remove their conditions or walk away from the deal.
Let’s use an example of an escape clause
Let’s say you’re looking for a new home and you finally find something you like after years of searching. How exciting! You decide you want to make an offer on the house but there is one main concern. In a balanced real estate market like we’re in now, you don’t want to purchase this new home without the guarantee that you can sell your existing home.
So, no problem! As an example, you make the offer on Jan 2 and have 5 business day conditions for financing and home inspection. But, you also plan to include a sale of property condition (SOP). This condition means that you’ll only buy the new house if you can sell your existing house. That way, you can line up the closing dates of the two and get the funds from the current house to pay for the new home.
But there is a problem for the seller here.
During this conditional period, the seller cannot sell the house to anyone else except to the original buyer. In our example, the seller would have to give the buyer 5 business days for financing and inspection. But they would also have to give the buyer enough time to prepare, list and sell their home. In this case, that’s 30 days!! During this conditional period the seller is locked to the original buyer. Therefore, they cannot review any back-up offer that may come in.
The standard SOP condition is for 30 days. This is not a rule, a SOP can be for any period of time as long as both parties agree) . So in this example, the buyer would have until Feb 1, 2024 to sell their home.
For the seller this is a problem
If the seller accepts this SOP condition, they are obligated to work with the current buyer for a month. They cannot accept any other offers during that time frame!
Let’s say it gets to Feb 1 and the home buyers still haven’t sold their home. Based on the release clause in the Agreement of Purchase and Sale (APS) they could walk away from the deal! This is without penalty by signing a mutual release. The buyer’s deposit is returned in full.
Now, the seller has wasted a month being tied up to a buyer who simply walked away. From the seller’s perspective, the seller has lost all their listing momentum. Additionally, potentially is left with worse market conditions which also impacts their sale price.
This is where an escape clause comes in.
An escape clause gives the seller an out
The escape clause is not for the benefit of the buyer, but benefits the seller. It acts as an insurance clause
In the above example, the buyer submits their offer. A conditional offer in real estate typically includes conditions clauses with 5 business days for financing and home inspection. As well, they add in a 30 day sale of property condition. The buyer wants this, because it’s no risk to them.
But a strategic real estate agent knows the ins and outs of real estate contracts. They will counter offer with an escape clause for their seller. The escape clause, typically 24 or 48hrs means that if while conditionally sold, if the seller receives a new offer from a second buyer that they like better than the original offer, they’re giving the current buyer 24 or 48-hour clause to remove ALL conditions (more about this below) or walk away from the deal.
This new second offer is worked on in the background of the existing offer. When the home seller/ sellers agent are satisfied with the terms of the offer, they formally issue 24 or 48 hrs to the existing offer to remove conditions. This short period of time allows the existing potential buyers to figure out what to do. Note that an escape clause is not the same as an irrevocable period (sometimes these get confused because they can both be 48hrs)
The important part is that the existing first offer has first right of refusal- either firm up or walk away. The seller can’t automatically accept the second offer instead of the first.
This way the seller will either get a firm (no conditions offer) from the first potential buyer. Or, the first buyer walks away and the seller accepts the second better offer that came in.
There are some misconceptions of an escape clause
Like any contract, ANYTHING can be written down. As long as both parties agree and sign off, it can be implemented. But there are a few things that need to be clarified in escape clauses when conducting real estate transactions.
Since escape clauses are not all that common (especially in recent years), many real estate agents haven’t dealt with them. As a result, we see all sorts of strange contractual provision. Here are a few of the common misconceptions:
1. The new (second offer) does not automatically “bump” the first offer
Let’s say the 2nd offer is for $100,000 more than the first offer. The seller REALLY likes it better than the current offer they’ve accepted. They still need to issue notice to the first offer. If the first offer removes their condition, they need to honour the terms in the originally accepted format.
This means the seller must legally accept the original offer in the current state. They cannot try to negotiate it further. In this case, the seller may not be too happy with the outcome! Especially if the second offer is $100,000 more in sales price than the original offer.
2. The original offer has to remove ALL conditions if served with an escape clause
This is where working with an experienced, detailed Realtor will benefit you. The difference of one word, either “THIS” or “ALL” is significant and both are acceptable, but have extreme different outcomes. Consider this wording:
– the existing buyer needs to remove THIS condition (remove the sale of property condition only, but could still be conditional on anything else in the contract)
– the existing buyer needs to remove ALL conditions (every single condition in the offer, now making it a firm deal)
3. A second offer has to be a firm offer
If a second offer comes in, you would think that it has to be a firm (no conditions offer). And in most cases, that’s what happens. But, the second offer just has to be “acceptable to the seller” in whatever that means to them. It could be more money, it could be a better closing date, or it could be less risky conditions. As an example, let’s say the sellers home is worth about $500,000:
– the original accepted offer is for $450,000 with a sale of property condition for 30 days to sell their current home
– the second offer is $500,000 with a mortgage financing condition of 3 days
If the seller thinks there is less risk to get $50,000 more with the second offer, in their eyes this may be “acceptable to the seller”.
They provide a delivery of notice to the original buyer to firm up their deal and remove the SOP condition. The first buyer decides it’s too risky and the back up offer is accepted. However, now it’s conditional on financing with the new buyer- which may also fall apart.
Talk to your Guelph real estate agents
Marketing is an important part of a salesperson. But your Guelph real estate agent needs to be a good negotiator and work for the terms that are beneficial to you in a sales contract. In this case, the addition of an escape clause in your home purchase contract is a very important element.
Beth and Ryan Waller are Guelph realtors with Keller Williams Home Group Realty.
