Financing and home sale contingency
Your home is essentially off the market when the buyers need to obtain financing approval.
Pre-qualified, pre-approved and approved:
The lowest level of loan approval assigned to buyers is “pre-qualified” to buy. This means that the buyers are qualified to buy up to a certain amount based on infor they provided, which hasn't yet been confirmed.
The next level up is being “pre-approved.” This means that key elements of the buyer-supplied information has been verified and looks good. The highest level of loan qualification is being “approved” which means that all documentation; job, financial and credit history has checked out and the buyers’ have been given the OK.
With today’s technology, lenders can provide pre-approval shortly after formal loan application. It’s important that your buyers have this level of financing approval; otherwise you’ll suffer a lot of lost marketing time should their financing prove unacceptable down the road.
Eventually, the lender will advise you that the buyers have been “approved” for the loan, but subject to the appraisal.” This means the loan is still subject to your home appraising for the selling price.
Maximum interest rate:
In the financing portion of the offer, the buyers often specify the maximum interest rate acceptable to them.
For example, if the current rate is 5 percent, the buyers may specify that the maximum rate acceptable is 5 or 5.25 (or whatever) percent. If the market jumps above the limit specified, the buyers can opt out of the contract. This could be their choice or it could be because they would no longer be able to afford the loan payments.
It benefits the buyers to agree (lock in) to the current rate to avoid this possibility.
Cash buyer wants appraisal:
Experienced buyers obtain their pre-approval, making them aware of how much they can afford, before bidding. Buyers, who may be putting down a large amount and financing a smaller amount, could bid on your home as a “cash buyer.” They omit any contingency on financing which gives them the appearance of being very strong buyers. This is legal and acceptable in most markets.
Even in this “no financing contingency” situation, buyers may stipulate that the home must appraise to the selling price.
NOTE: Some contracts state that you can arrange to secure financing for the buyers if their financing source falls through. This option is rarely ever pursued. If a lender won't extend them credit, why would you?
HOME SALE CONTINGENCY
An offer that is contingent upon the sale and close of a buyers’ residence is fairly common in slower markets. Most buyers need to sell their home so that they have the funds to purchase another home.
This contingency really means that the sale of a home will now be dependent on the sale of the buyer's home. Not a desirable situation, but acceptable if a seller has problems finding a buyer.
Contingency buyers will often make a more attractive offer in order to offset this drawback.
Decide how saleable is the buyers’ home? Is it appropriately priced? Will they ask for 30, 60 or 90 days to sell theirs and more time for it to close? If the buyers' home has been on the market a long time, this sends a red flag. You do not want a contingency offer from buyers who have a house that won’t sell.
If you're going to accept a contingency offer, shoot for one of four to six weeks. Why? Buyers have little incentive to lower the asking price of their home if they're given a long time to sell it.
Suppose you accept a 30-day contingency offer but their home doesn’t sell. They'll probably request an extension to the contingency period. Request that the buyers lower their asking price; otherwise you can refuse to grant the extension. However, if you have continued to market your home without success, why not grant them more time to get their home sold?If you're listed and considering a contingency sale, find out how your MLS status will be displayed to other agents and buyers. Some MLSs will show that your home is still for sale, but with a kickout contingency. Others will display it as having a contract, without mentioning the contingency. This often eliminates future showings by the agents, which could affect your decision on accepting the offer.
The contingency should state that your buyers cannot sell their home to someone who has to sell their home. Otherwise, this just creates a chain of contingencies, increasing the chances for something going wrong with one of the sales in this domino situation.
Getting around a contingency:
In a decent market, a common solution is for the buyers to get a short term or “bridge” loan to buy your home, until they can get theirs sold.
This is used extensively in a hot market when sellers refuse to accept this contingency. Smart buyers secure approval for a bridge loan before even making an offer.
Buyers might also consider borrowing from their 401K, retirement plan, against their home equity line of credit, against a stock market account or they could cash in some CD’s. Could you offer them short term financing? Investigate this as a last, desperate resort.
Contingency on the close (not sale) of buyer's residence:
It's very common that an offer is received from buyers who have a contract pending on their home and are making their offer contingent just on its closing, not the sale.
If the buyers’ home has been under contract for three plus weeks, the more likely it is to close. By this time, the buyer of your buyer usually has been through a home inspection and made formal loan application without red flags appearing that would derail the sale.
If you're not using an agent, it is imperative that you engage the services of an attorney to provide legal review and proper guidance in these situations. It’s their job to protect you through the proper wording and modification of the contract.
The "kick out"
In some areas, contingency sales are common, and the property is still actively marketed.
This is accomplished by having the buyers agree to accept a “kick out” clause in the contract. It states that the seller can continue to market the home while it's under contract. If a second buyer is found, the first buyer is given notice and has 24 hours to decide to drop (eliminate) this contingency on the sale of their home.
A 24-hour kick out period is more than adequate but sometimes 48 hours is agreed upon. When the buyers are advised that there is another offer that has been accepted, they should have already investigated short-term financial arrangements so they can immediately drop their contingency and continue with the sale. If not, the contract is voided and the second buyers contract becomes valid to complete the sale.
If the first buyers drop this contingency and proceed with the sale, the contract should state that if the closing fails to take place, the buyers will forfeit their earnest money. This stops the buyers from simply dropping this contingency and saying they'll complete the sale, but then get their earnest money back in the event that they are unable to secure financing approval. The purpose here is to turn up the heat on buyers who, by dropping this contingency are stopping you from accepting the second offer.
Example of how this clause would appear.
Here is an example of a clause that could be used for a sale based on the contingency of the buyers’ house. It is intended to familiarize you with the wording and logic of a home sale contingency. While this example may work in your situation, you should use a clause that has been approved by your attorney.
1) This addendum is part of the sales contract to purchase real estate located at ___________________________________________
by and between Sellers______________________________________
and Buyers _______________________________________________
This contract is dated _____________________
2) Closing of this transaction will be contingent upon the Buyers successfully selling and closing on a sale of their property located at ______________ ___________________________________________________________
on or before _________________________ (date).
3) The Sellers may continue to market the real estate. The Buyers will notify the Sellers, in writing or by fax, when the Buyers have entered into a contract to sell Buyer’s real estate that will be closed within ____ days.
4) If the Sellers receive an acceptable offer from another buyer, the Sellers will notify Buyers of this offer in writing or fax and the Buyers will have ____ hours to remove this contingency without regard to the sale and close of Buyers’ property.
If Buyers fail to waive this contingency within the stated time, then this contract will become null and void and the earnest money will be promptly returned to the Buyers.
5) All notification time periods will begin upon written delivery to the respective parties.
Date: _____________________ Date: ______________________
Buyer _____________________ Seller ______________________
By-owners are strongly advised to have this reviewed by an attorney prior to entering into a contingency sale agreement.
More on CONTINGENCIES