An addendum is a further condition or document added to an existing contract. There are a number of reasons why you’d add an addendum to a real estate purchase, although it’s not always something you’ll encounter when buying a property. Let’s take a look at what an addendum is, when you’d want one, and the differences between addendums and amendments.
Definition and Examples of Addendums in Real Estate
An addendum is a document you add to your real estate contract. It contains contract terms that weren’t present in the standardized contract forms. Here are some common amendments to add to your offer on a home:
- A request for the seller to cover all or some closing costs
- A contingency that is dependent on the completion of a home inspection
- A request to complete repairs to the home
- A request to leave behind furniture or even appliances
- A contingency that includes completing the sale of your home
- A financing addendum that states the transaction is dependent upon your securing sufficient financing
Keep in mind that an addendum must be part of the original purchase and sale agreement, which means it will need to be submitted along with your original contract.
How Addendums Work
Let’s pretend you and your family have been home-shopping recently. You’ve found a house you like and have put in an offer—and, happily, your bank already has given you a preapproval while the seller is considering your bid. You want to be sure, however, that the home is in good shape before you close.
This means that when you filled out the preliminary paperwork, you chose to add a contingency. This contingency, as one example, states that closing on the home is dependent on a satisfactory home inspection. It’s added on to the original paperwork as an addendum.
Addendums may be more common in a buyer’s market, where there are more homes on the market than there are buyers. In the case of a buyer’s market, those looking to purchase a home may feel able to request additional accommodations from sellers. These can come in the form of addendums such as home inspections, the inclusion of furniture, and completing the sale of the buyer’s existing home.
The opposite is true in a seller’s market. When the market is hot, the seller is able to pick from their choice of offers, so contracts with addendums may be less appealing than those that are more streamlined with fewer requests.
If the seller accepts your offer, along with any addendums, you can proceed with escrow.
Addendums vs. Amendments
Addendums aren’t the same things as amendments. Let’s continue with the above example. Say that the home inspector has finally completed the inspection. Fortunately for you, it was raining while they completed the inspection, and a quick visit to the house’s crawl space revealed significant pooling of water. If left unremedied, this water will erode the foundation.
The inspector recommends a new drain system be installed to fix the flooding. Now, because you’ve already signed a contract with an addendum that makes your offer contingent upon a satisfactory home inspection, you can choose to leave the contract. A foundation full of water, after all, may become a big problem, if not repaired.
However, your family loves the home and you haven’t found anything comparable nearby. So rather than backing out of the contract, you ask your realtor to complete an amendment requesting the seller add in a new drain system prior to closing.
Be aware that both parties must agree to any amendments in order to move forward with closing. The same is true of any addendums.
Unlike an addendum, which is added on to the purchase and sale agreement prior to the contract being signed, an amendment is an additional term added in after the agreement and contract have been executed.
- An addendum in real estate transactions allows you to add terms to your contract before it is signed by both parties.
- Common addendums include contingencies such as home inspections or the sale of the buyer’s house, as well as including certain items, like furniture.
- Addendums are created before both parties sign a contract; amendments are made after the parties have signed a contract and a change must be made.