Selling your home has plenty of stress, but contingent purchase offers can bring additional stress. According to a recent survey by Zillow, 52% of sellers worry about the sale of their home falling apart. Managing contingencies is a big part of having a smooth transaction.
In this article, we look at the various types of contingencies, and how sellers and buyers can navigate around them.
What are contingent home offers?
A contingent home offer is simply an offer to either buy or sell a home with an additional condition. These conditions, if not met allow the buyer or the seller to cancel their contract.
The majority of home purchase contracts have some condition for the sale to be completed. For example, in California, the standard Realtors® contract includes contingencies for home inspection, appraisal, financing and the sale of the buyer's existing home.
What problems do contingent offers create for sellers and buyers?
Contingencies allow buyers, and sometimes sellers, to cancel a contract without penalty.
When a seller accepts a contract with buyer contingencies, the seller is usually required to stop marketing their home for sale. They are unable to accept any other offers, other than for backup purposes. In the event the buyer backs out of the contract, the seller has lost valuable marketing time or even better offers.
Common purchase contingencies
As previously mentioned, a home inspection contingency is on of four standard contingencies in your Realtor® provided contracts. Most buyers spend on less than 30 minutes in your home. While they're all googly eyed over the kitchen, they' may be blind to problems beneath the surface. They miss things like foundation cracks, electrical problems and termites.
As part of the buyers due diligence, their agent will typically order a home inspection. Professional home inspections allow buyers to be aware of potential problems in the home.
Home inspections are extremely important. In fact, most agents won't let their buyers purchase a home without obtaining a professional home inspection. They also can protect agents from lawsuits from their clients for not protecting their clients from problems.
The typical home inspection involves the inspector testing the various systems. These include the HVAC, hot and cold water, electrical as well as reviewing basic structural components. The inspector then provides a report back with their observations and recommendations. Sometimes the problems found are minimal, such as a missing electrical cover plate. Other times they're significant such as a failing HVAC system.
Once the home inspection is completed, the buyer has the opportunity to continue with the purchase, request specific repairs or to cancel the purchase contract.
Most home buyers require financing unless they are cash offers. Typically, cash offers come from investors or move up buyers with substantial savings.
Purchase contracts that require financing will usually have a financing contingency. This allows the buyer to back out of the purchase if they are unable to obtain financing. Additionally, they may stipulate the maximum interest rate the buyer is willing to pay for the loan.
Any purchase that is being financed, is likely to have an appraisal contingency.
The buyer's lender will order a professional home appraisal to be completed prior to funding the buyer's loan. If the property doesn't appraise for the value required by the lender (typically the purchase price), the lender may not fund the transaction. The alternative is for the seller to agree to a lower sales price or for the buyer to provide additional funds above the appraised value. If they home is priced correctly for the market and the buyer hasn't overbid the purchase price significantly, this usually isn't a problem.
Don't be fooled. Just because someone offers you substantially over market price for your home doesn't mean it will appraise for that value.
Sale of existing home
While move up buyers offer the advantage of higher down payments and more cash, they often need to sell their existing home prior to completing the purchase of their next home. If your home is in a move up neighborhood, expect this contingency. These buyers will want to be able to sell their existing home and use their equity to purchase your home.
Beware of the Domino Effect
Jeff Lichtenstein of Echo Fine Properties in Florida cautions about what he refers to as the "Domino Effect". A domino effect occurs when the sale of your buyer's home, is contingent upon other conditions for the sale of their home.
For instance, what if the buyer of your home is contingent upon the sale of your buyer, Ms Andrews's home? Then what contingencies does Ms. Andrews have for her house to be sold? What if Ms. Andrew's buyers, the Stewart's purchase is contingent upon the sale of their home? It only takes the Stewart's sale to fall apart, for your sale to be potentially impacted.
The domino effect can be carried on through two or three transactions. If you don't know what contingencies the sale of your buyer's home has, you are working blind. If you are considering an offer contingent on the sale of another home, have your agent obtain a copy of that contract and any addendums. That way you won't be guessing as to what might possibly go wrong with your buyer's sale.
Less common contingencies
Buyer physically seeing house
Due to COVID-19, many buyers are moving from the coastal cities to inland locations. As a result, it is not uncommon for potential buyers to write offers sight unseen. These buyers may be fully depending on their Realtors®pictures or a video walk through. Buyers who are purchasing an out of state home will typically stipulate that they are able to see the home prior to sale.
This can add substantial risk of cancellation to the sale of your home. Lichtenstein says he sees about a 50% cancellation rate from out of state buyers. He says, "Things just look different in person. And once the buyer makes a commitment to come down, they take a look at everything else on the market".
Many areas of California have been impacted by wildfires causing their homeowners insurance to be cancelled. Other states are impacted by hurricanes. For instance, Tiffany Heathman a Realtor® in Houston says, "when a tropical storm is incoming, insurance companies sometimes refuse to start a new policy, and they can force a delay in the sale."
In some of these areas, affordable homeowners insurance can be difficult to obtain. In parts of California that are deemed to be high wildfire risk, homeowners insurance can be as much as $4,000 a year. You might find your purchase contract has a contingency for the buyer to be able to find affordable homeowners insurance.
Contingency time frames
Most contingencies have a specific time frame in which they must be removed. For instance, in California, buyers have 17 days to complete their inspections. Financing contingencies typically are 21 days. While these are standard, time frames can always be negotiated. For instance, in a sellers' market, sellers may also negotiate for shorter inspection periods. Additionally, buyers wishing to have a more attractive offer may choose to remove their inspection contingency in 7 days.
Remove contingencies with your counter offer
Not every contingency will be acceptable. Keep in mind that some agents ask for the world, hoping the seller will desperate or stupid.
For example, we routinely receive offers from buyers with a contingency for the sale of the their home. Sometimes, the buyer's home isn't even listed for sale yet. Most of the time, we would simply reject these offers.
However, what if you own a home that is more difficult to sell? You might want to consider accepting their offer, but negotiate timelines of when their home must be listed and sold by.
Motivating buyers for speedy contingency removal
With high demand properties or sellers' markets, sellers can charge per Diem fees if buyers close escrow late. This is very common when buying bank owned properties. Banks will charge buyers a couple of hundred dollars a day, for every day the buyer closes late. These fees are not exorbitant, but can be very motivating to buyers to make sure their transaction moves quickly.
Contingent offers make up over 80% of the typical real estate transactions. Knowing what contingencies you are willing to agree to is part of the give and take a negotiation. Remember, you don't have to accept every contract condition blindly. You can also counter offers and negotiate alternatives. Shorten time periods. Insist that buyer's homes already be in escrow if a contingency. Be specific about timelines and use per Diems as incentives.
Just be flexible, try to understand the other party's needs and try to find a common ground.
This story was condensed from What every seller needs to know about contingent offers.