Lack of inventory, making sellers reluctant?

One explanation for the lack of inventory in so many market areas today is that many would-be sellers are reluctant to put their homes on the market because they are unsure that there will be a satisfactory supply of replacement homes for them to choose from. To be sure, this is a bit of a chicken-egg (which came first?) thing, and it will all sort itself out eventually. In the meanwhile, though, the lack of replacement homes in one price bracket may itself be the cause of a lack of inventory in a lower price bracket.

One way that those who want to sell can deal with this problem is by making the sale of their home contingent on their ability to locate a suitable replacement.

We are all used to buyers having to make their purchase of a next home contingent upon the successful sale of their present one. It isnât the norm, perhaps, but it is certainly common. Depending on market conditions, a contingent buyer may or may not be competitive with other buyers. Certainly, one who is already in escrow is more competitive than one who is not yet on the market.

When sellers want the sale of their property to be contingent on their ability to find a replacement, it puts them in a position not unlike contingent buyers. Not everyone will want to enter into a contract with them. Whether it would seem prudent to do so will depend on a buyer's judgments both about the market and about the seller.

The California Association of Realtors® (CAR) has made available to its members a form, "Contingency for Sale or Purchase of Other Property", that is designed for use in either situation. One part of the form provides for a contingency based on the sale of a buyer's present property; the other establishes a contingency on "Seller entering a contract to acquire replacement property." Either part can be used without the other. It would be an exciting transaction, indeed, if both were applicable.

The two parts, however, are not exactly mirror images of each other. They are asymmetrical. The differences are important.

The buyer contingency is based upon the close of escrow of the buyer's present property. As long as the buyer has not removed that contingency, he is not on the hook in the event that - as happens from time to time - his escrow falls apart. Of course, he and the seller may work something out in the alternative; but the fact remains, if his escrow fails, he is not obligated to buy.

The seller contingency, on the other hand, is based on the seller "entering a contract to acquire replacement property" It is not based on a successful closing on the replacement property.

It is not uncommon for purchase contracts and escrows to be cancelled because some unsatisfactory condition of the property is discovered by the buyer during his investigation period. This might not happen until the parties are a week or two - sometimes longer - into the transaction. For this reason, a seller who has a subsequent purchase contingency would be well advised not to remove that contingency at least until they have completed their investigations. Otherwise, they might obligate themselves to sell, even though they have not yet identified a satisfactory replacement.

Currently, there are so many dominoes out there. May they all fall in the right direction at the right time. 


Written by Bob Hunt
March 26, 2013