Contingencies

A - Home Sale Contingency: How important is this buyer contingency?

Home sale contingency

Contingency on the sale of buyer’s residence:

An offer that is contingent upon the sale and close of a buyers’ residence is fairly common in slower markets. However, this brings a whole new dimension into the negotiations.

Most buyers need to sell their present home so that they have the funds to purchase yours. This contingency really means that the sale of your home will now be dependent on the sale of their home. Not the most desirable situation, but acceptable if you’ve had problems finding a buyer.

Buyers with this contingency usually offer a more attractive price. On the other hand, if you’re having problems selling your home, you’ll be much more open to a sale contingency.

Contingency considerations:

You'll have to 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. 

Shoot for a short contingency period of four to six weeks. Buyers have little incentive to lower their asking price if they're give a long time to sell their home.

Suppose you grant them a 30-day contingency and their home doesn’t sell. They could request an extension to the contingency period. You could request that the buyers lower the asking price of their home to appeal to a broader base of buyers; 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?

The contingency should state that your buyers cannot sell their home to buyers who have 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.

If you are listed 

If you're 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 usually eliminates future showings, which could affect your decision on accepting the offer.

Contingency options:

A common solution to eliminate this contingency is for the buyers to get a short term or “bridge” loan, until they can get their home sold.

A bridge loan is used extensively in a hot market when sellers refuse to accept this contingency. Many buyers secure approval for a bridge loan before even making an offer.

The 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 on its closing.

If the buyers’ home has been under contract for two to three weeks, the more likely it is to close. By this time, the buyers’ buyer usually have been through their home inspection and made formal loan application without red flags appearing that would derail their sale. 

With a sale and/or close contingency, it is imperative that you engage the services of an attorney to provide legal review and proper legal guidance, especially if you're not using an agent. It’s their job to protect you through the proper wording and modification of the contract (before you have signed it!).

The "kick out"  

Contingency on a sale, with notice:  

A bridge (temporary) loan is the customary solution to eliminating a contingency problem. In other areas, contingency sales are common, and the property is still actively marketed.

This is usually accomplished by having the buyers agree to accept a “kick out” clause in the contract. This clause is present as an option in most contracts. It states that the seller can continue to market the home while it's under a contract with this home-to-sell contingency. If a second buyer is found, the first buyers is given notice and have 24 hours to decide to drop (eliminate) this contingency on the sale of their home.

This response period is usually 24 or 48 hours. A 24-hour kick out period is more than adequate. 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 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.

It could be agreed upon in the contract that the earnest money would be increased to some specified amount if the contingency is later dropped and will be forfeited if, for any reason, the buyers are unable to complete the sale. The purpose here is to turn up the heat on buyers who, by dropping this contingency, are stopping you from accepting the second offer.

Contingency on a sale, without notice:

In the event you do not want to be handicapped with this contingency and the buyers cannot get a bridge loan or haven't started the process to obtain one, there is another alternative to the “kick out” clause above. Have the buyers agree to a sale with the contract containing a clause for a contingency sale without any notice (no 24 or 48 hour notification). 

In essence, this clause specifies that if you accept an offer from a second buyer, the first contract is immediately and automatically voided, without you having to give any advance notice to the first buyer.

You'd notify the first buyers ASAP that your contract with them is voided since you have accepted another offer. Earnest money is returned to buyer number one and the new buyer has a deal.

It puts pressure on the first buyer to quickly get preapproved for a bridge loan or to sell fast before a second offer can be accepted (and to quickly notify you in either case).

This option is the best deal for you, as you have nothing to lose. There is a contract only if the first buyers find a way to eliminate their problem of selling their current home. Your attorney should review this.

In effect, it's like having a contract for a contract. What this contingency does do is to contractually spell out the price and all the terms and conditions that the buyers and seller agree to, but the contract is valid only if the buyers advise you that they can eliminate their need to sell their home in order to buy yours - before another buyers' contract is agreed upon. 

Here are examples of how these two types of contingencies clauses would appear.