Contingency Complications
[Editor’s Note: The views expressed here are solely those of Ross Kaplan, and do not represent Edina Realty, Berkshire Hathaway, or any other entity referenced.]
“Lake Wobegon, where all the women are strong, all the men are good-looking, and all the children are above average.”
–Garrison Keillor
It can be hard enough shepherding one deal to a successful closing.
Tying the fate of a home sale to a second deal — specifically, the sale of the Buyer’s current house (called “the backup home”) — ups the (risk) ante considerably.
It hardly helps matters that — shades of Lake Wobegon — Buyers’ agents invariably represent the backup home as being in a demand neighborhood, in great condition, and “priced to sell.”
And days (hours!) away from being on the market, no matter the reality.
All of which is why most Sellers eschew so-called Contingent offers in favor of offers that are only contingent upon the Buyer’s inspection and financing.
Marketing Chill, or, “Can You Explain That to Me Again?”
“But,” proponents argue, “can’t Sellers get out of a Contingent deal whenever they want?” (by “calling” or removing the contingency).
And if that’s the case, what’s the risk?
Just this: a home that’s “Sold, Contingent” has to be disclosed as such on MLS.
Practically, that can have a chilling effect on Buyer showings, because other Buyers know that, while they may be able to bump Buyer #1, there’s also a risk that Buyer #1 may find a way to buy non-contingent — and suddenly there’s a bidding war for the home (note: a contingent Purchase Agreement typically gives the Buyer 2-3 days to remove the Contingency once the Seller calls it).
Of course, simply explaining all of the above to prospective Buyers is a turn-off.
Three’s a Crowd
While many backup homes sell quickly, more than a few have been known to languish on the market, jeopardizing deal #1.
Especially when the backup home is located in a different housing market — and subject to different state and local laws — determining its salability and likely market time can be difficult.
Which is why my standard advice to Buyers — at least ones who are in a financial position to do so — is to consider either a bridge loan or a home equity line of credit in order to be able to buy non-Contingent.
The associated fees are likely less than the premium they’ll have to pay to entice a Seller to accept a Contingent offer (see below) — and less than the discount they may have to accept in order to sell their current home quickly.
Of course, purchasing non-Contingent also avoids the potential heartache of a Buyer finding — and then losing — their dream home altogether.
Selling the Seller on a Contingent Offer
With all those negatives, why do some Sellers go for Contingent offers?
Two reasons: 1) Price (to compensate for the added risk, Buyers often make a richer offer); and 2) it’s better than no deal at all.
In addition, there’s a school of thought that — at least for some Buyers — knowing a home is under contract to someone else makes it more desirable and actually whets their appetite.
Meanwhile, the Buyer’s agent can increase the odds of the Seller entertaining a Contingent offer by providing good, objective info about the backup home, including a Comparative Market Analysis (“CMA”); putting the Seller’s agent in touch with the listing agent on the backup home, etc.
See also, “Daisy Chains, Dominoes, & Contingent Offers“; “Contingent Offers: Getting (Very) Comfortable With the ‘Backup Home'”; and “What Asterisk Clause Offer and Contingent Offers Have in Common.“
