What is a "Time Is Of The Essence" clause, and why does it matter?
The picture below is from Page 2 of the PA Standard Agreement for the Sale of Real Estate, the boilerplate form most Realtors use to make an offer:
This paragraph says, essentially, that the potential agreement is based upon the time of execution, or the time when both parties agree and sign the document. It puts a time limit on the offer and the agreement. In essence, it says "I want to buy your house, but I need you to sign this contract and agree to close the sale at a certain time, and if you don't do that, we don't have a contract."
"Time is of the essence" means that the agreement is based upon and contingent upon the precise timing of certain events within the contract. This is all normal and standard practice for many different kinds of contracts. Precise timing allows multiple parties to coordinate and cooperate. This cooperation among many different parties with diverse interests is the main advantage of the idea of a contract in the first place. A contract allows people to trust each other and to coordinate their efforts, even if they're complete strangers. Contracts allow us to achieve much more as a civilization than we ever could without them, and as with many things in life, timing is everything.
However, I would like to draw your attention to paragraph 5(A). I believe this line is abused by most agents, and unsuspecting sellers can make poor decisions if their agent doesn't properly explain the meaning and implications of this sentence.
Often, agents will present an offer with a time limit on line 51 that works out to about a single day. Why do they do this? They want to create a sense of urgency. It's a sales tactic and a negotiation approach. They want to make it seem like a limited opportunity and to create a false sense of urgency in order to pressure the seller into deciding quickly in favor of the buyer. However, if you're the seller, you need to ask yourself this question: "If I don't accept this offer by the date specified on line 51, what will happen?"
Whenever there is a deadline in a contract, and there are many of them in the standard agreement for the sale of real estate, it usually makes sense to ask "Or what?" The contract says you have to do such and such by a certain time, but what's the consequence if you don't or can't?
It's your agent's job to help you understand the consequences, benefits, and detriments of either compliance with or rejection of certain time frames in the contract. Unfortunately, many agents are simply not equipped to do this because they themselves don't really understand the contract, and don't have even a rudimentary understanding of contract negotiations.
I usually advise my seller clients to ignore 5(A). Think about it: what will the buyers do if you don't sign by their desired date? Will they walk away? Possibly, but why would they do that? Are they not really committed? Are they only half interested? If simply waiting for an additional 24 hours can make them walk, what will happen if there there are less than perfect home inspection results?
Does your house suddenly stop being desirable to the buyer after an additional day or a few hours? Why would that be the case? Is the buyer's financial situation shakily dependent upon some arbitrary date, or are they somehow forced to get an offer accepted right now, today?
Is the buyer deciding between two or more homes, and letting time decide for them? If you don't accept their offer by the date specified in 5(A), are they just going to go with another house?
More than likely, the answer to all of these questions is "No." Really, they're trying to force you to sign the agreement right now because they're afraid that a competing buyer will swoop in and make a better offer. It's a big disadvantage for the seller to sign an agreement before all potential serious buyers have had a chance to see the home and make offers. The more offers, the better. If you're getting a lot of requests for showings, it doesn't make sense to sign an agreement too hastily.
In fact, whenever I see a short deadline on 5(A), I encourage my sellers to counter-offer with a significantly higher price. A short deadline on 5(A) signals a desperate and fearful buyer, and that signal can be a big advantage for you as the seller.
When I work with buyers, I usually advise them to leave 5(A) blank. Other agents in my market are mystified and thrown off by this, and I have been able to help my buyer clients negotiate lower prices and better terms even in this extreme sellers market by simply refusing to signal time limits one way or another. Some will criticize this approach in the sense that it leaves the offer "open-ended." Technically, the seller could sign the offer at any time, and the buyers would be bound to the agreement! Of course, I have found ways to protect my buyer clients from this exposure, though I won't share my strategy in this blog post for several reasons.
I won't detail all of my negotiation tactics on behalf of buyers here, but there are many ways to use time toward the buyer's advantage while ensuring that the buyer is not exposed to an offer just hanging out there forever. If you're a buyer interested in looking for a home, feel free to contact me and I'll be happy to explain!