Contingencies when Purchasing a Home, Pros vs. Cons

June 24, 2007

Contingencies are always a toss up. Have your Real Estate Agent assist in weighing your options and researching before accepting (or making one). As a BUYER, my advice is sell your current home first – you not only have more negotiating power to get the home for a better price, but it also affords you the patience on the selling end. — Angela

As a SELLER before accepting a contingency, consider the following; 1) is the buyer’s home priced aggressively, 2) how long has it been for sale, etc., 3) is the offer high enough to warrant the risk?, 4) what is the earnest deposit? 5) be aware although your home my remain “active” on the MLS, most agents will not show the home knowing it’s already under contract.

Should you Write or Accept a Contingency?

MINNEAPOLIS (MCT) – Amy Hyatt-Blat heard the horror stories of homebuyers who ended up paying mortgages on two houses, and wanted to avoid that when she decided to buy a bigger house. So when she made a full-price offer on a townhouse in south Minneapolis, the proposal was rejected.

The deal breaker? Her offer was contingent on selling her condo. She and her husband tried again by making a full-price offer on another Minneapolis townhouse, and while this offer was still contingent upon them selling their condo, they sweetened the deal by offering to lower the price on the condo to show the seller they were serious about selling.

Their strategy worked. Three months later, their condo sold and they have no regrets.

“There are so many things that are out of your control,” Hyatt-Blat said. “But one thing you do have control over is whether or not you choose to gamble on how long your place will be on the market.”

Contingencies have become a way of life for buyers and sellers in today’s challenging housing market. Buyers don’t want to take a chance getting stuck with two mortgages, and eager sellers are more willing to accept any offer, even if it includes a contingency.

Contingencies, however, are a gray area in the negotiating process, so both buyers and sellers should weigh their options before making or accepting them.

“Be very cautious and thoughtful about offers that are contingent,” warned Faith McGown, an agent with Coldwell Banker Burnet.

During the strong sellers’ market of recent years, contingencies were rare because buyers were confident they could sell before closing on their next home.

That’s all changed. The average time it would take to sell the current supply of houses on the market is 8.4 months, according to the National Association of Realtors. The market is considered to be balanced between buyers and sellers when there is roughly a five-month supply of homes available.

Contingencies can be a conundrum for sellers, too. Realtor Steve Fiorella has a client who recently rejected an offer contingent on the sale of the buyer’s northern Minnesota home. Fiorella and his client checked on the property and determined that it might be a difficult sale.
Fiorella, head of the Fiorella Group in Re/Max Results’ Apple Valley, Minn., office, said it’s common to stake out a buyer’s home. “First and foremost, you want to make sure that the buyer of your home is marketing their home aggressively and pricing it accurately,” he said.

McGown said it can be a smart move for buyers to make a full-price offer to make up for the contingency. To Fiorella, it’s even better to offer more earnest money with a portion of it nonrefundable. “Additional earnest money will show that you’re into making things happen,” he said.

Contingencies can be confusing, stressful and complicated. Usually, there are many variables, such as the length of time that the buyer will have to sell their home before the contract expires, the potential of another buyer making a better offer and how comfortable the seller is with the buyer’s ability to sell their home.

That’s why McGown generally discourages buyers from making them.

“Get your house sold first, then make an offer. You have so much bargaining power when your house is sold and you’re going in non-contingent,” she said. “You need to sell your house before you can buy the new one anyway.”

Contingencies can be a headache for developers, too. Most lenders won’t count contingent offers as a legitimate purchase agreement, which is used to determine what the bank will set the interest rate at and when construction can begin.

“Contingencies have gone from being something of a nuisance to being a deal breaker for a lot of sellers,” said Scott Parkin, marketing director for S.R. Hoffman & Associates in Minneapolis, which handles marketing for several condominium projects.

“They know that when someone has a home to sell, it’s a crapshoot if that home is going to sell in any reasonable time in this market.” Parkin said some developers are even targeting buyers who are unlikely to make a contingent offer.

“If you can bombard an apartment building with fliers about your new construction project, those renters won’t need contingencies.” Parkin said. “In this market, offers without contingencies are golden.”

While contingencies can complicate a deal, they can also motivate buyers.

Hyatt-Blat, for example, lowered the price on the condo she was trying to sell, hung color notices in coffee shops and at work, sent out personal invites and kept her condo in showing condition for three months until it sold.

“I was tempted (to make a non-contingent offer),” Hyatt-Blat said. “But what I wanted more than that townhome was peace of mind. It’s better to lose a place and wait than to roll the dice and gamble taking on a second mortgage.”

SELLER’S PROS

  • The market doesn’t have as many buyers as it does sellers, so if you get an interested buyer, it might be wise to try to make it work, said sales agent Faith McGown.
  • You’re more likely to get a full-price offer from a buyer who wants to make up for an unattractive contingency.
  • Typically, there’s nothing about a contingent offer that prevents you from accepting other offers while you’re waiting for the would-be buyer’s house to sell. This could start a bidding war and could result in a higher offer.
  • You have the upper hand. “How much can a buyer really negotiate because – let’s face it – they don’t even have their home sold,” said sales agent Steve Fiorella.

SELLER’S CONS

  • Contingent offers must be disclosed to other interested buyers and that can decrease activity. Buyers have so many choices in this market that they don’t want to waste their time in a bidding war.
  • You have to guess how long it will take for the buyers to sell their home. If they’re not able to sell by the time the contract expires, then you’re back at square one.

BUYER’S PROS

  • You eliminate the risk of paying for two mortgages should you not sell your current house in time.
  • The contingent offer could motivate you to do things to get your house sold that you wouldn’t normally do.
  • When buying a newly constructed home, writing a contingent offer could lock in an incentive or a special introductory price.
  • If another offer is made while you’re still trying to sell your house, typically, you’ll get the first chance to sweeten the offer by lifting the contingency or raising your price.

BUYER’S CONS

  • Because your offer is contingent on the sale of your house, you lose a lot of leverage and only gain an option to buy the house.
  • Some sellers won’t consider a contingent offer.
  • If the home is attractive to first-time buyers, chances are good that the sellers will get a non-contingent offer from someone who is renting and doesn’t have a home to sell first.
    Someone else can make a better offer at any time and you’ll lose the house. This can be emotional, as buyers often get their hearts set on a home that they don’t yet own.

Are you considering moving in the Omaha Metro Area? If so, please visit my website; https://www.huskerhomefinder.com/ for all of you real estate needs!

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