By Mike Bodeen · 2 November 2015
The Contingency Sale – Consider But Verify
Part One
For those who follow our weekly blog, you’re well educated that our Phoenix/Scottsdale residential real estate market has been and is still sustaining a healthy balance. For example, the most recent S&P Case / Shiller Home Price Index shows Phoenix running a 4.95% annual rate of appreciation – a number that’s positive for both buyers and sellers. Also, as we’ve reported, foreclosures in Phoenix are running at historic “lows,” whereas just a few years ago we along with Florida and Nevada were leading the nation in the highest foreclosure rates.
Our steady and solid market has now brought back into play what’s commonly known as the “Contingency Sale.” The contingency sale simply allows a buyer to buy a home with a “contingency” to close escrow on their existing home first so that their proceeds of sale can then be used to close escrow (down payment and closing costs, or cash) on their new home. This enables the buyer to get the best price they can on their existing home the without risk of losing a deposit.
You might think that that’s the way it should be, however, for the better part of the last decade, that’s not been the case. When we were in the throes of a rabid seller’s market, sellers did not need to give a contingency as there were plenty of buyers with cash or good financing without the need to sell their home who lined up to buy the home. It’s only been recently as our market has steadied that sellers figured out that this could be a smart tool to get their home sold and move into their next one without having to move twice. And it can be a smart tool as long as some precautions are taken to vet the buyer and what he’s selling.
Next week we will look at some contingency sale safeguards that a seller can take to protect their interest and not get stuck.
Here are some basic safeguards that sellers can take to not get stuck in a bad situation, such as allowing a contingency on a questionable escrow the seller is asked to wait for its closing. Next week we will look at best buyer practices.
Mike’s best seller practices in order of safeguard:
1. The first and most important rule is to honestly assess which home (yours or the buyer’s) has the greater likelihood to sell first. If your home has been languishing on the market with few or no offers and the buyer’s home that they need to close on will be a slam dunk quick sale, then certainly consider their offer. In all instances, you and your professional Realtor should do a thorough investigation as to the facts of the buyer’s current deal.
This includes the aforementioned interviews of agent, lender, and Title Company to determine the viability of the deal hanging together. Because if their deal falls apart, your deal falls apart and you get nothing plus you’ve lost time.
2. Consider taking a contingency on a home if the buyer’s home is already in escrow, and through its “Due Diligence” (inspections) period including the negotiating period which can stretch out to 10-15 days or more. This assumes the buyer’s buyer does not also have a home to close on. You can allow this, but it’s very tricky. Much investigation needs to go into the quality of the other deals. This includes interviewing the other affected Realtors, lenders and title company officers and reviewing sale documents to make sure there’s no hidden hooks that can pierce the deal. I’ve been in escrows that have had up to four other homes that needed to close before my client’s home could close. These are possible, but harrowing and not for the faint of heart.
3. Consider taking a contingency if the home just went into escrow and has not yet gone through its Due Diligence period. This can also work, but a few more questions need to be addressed about their property itself to determine if it should pass an inspection from the buyer. Again, this is a duty of you and your professional Realtor.
4. Consider taking a contingency if the buyer’s home is NOT in escrow, if in your opinion and that of your Realtor’s, the buyer’s home is more likely to sell before yours because of better pricing, condition, location, etc. It’s still a matter of the odds.
Question: How long should you give the buyer’s to sell their home? It should be within one-two days of their closing. They will need to transfer funds to close on your home. The problem with #4 above is that it’s an unknown until they get their home in escrow. There should be a definite cut-off date however.
Question: Can I accept another offer while under contract to sell to another? Usually not, unless you include a clause known as a “Contingency Release Clause.” This clause allows the seller the opportunity to take a new buyer’s offer after first giving the existing buyer the right to eliminate their contingency (72 hour right of refusal) and proceed to close escrow. This needs to be set up when the deal is first structured.
There are a number of other issues that should be addressed as well, but as you can see this is not something that should be either lightly accepted or rejected by a seller. There are a number of benefits in this package, but each deal needs to be weighed on its own merits. And as always, we recommend that buyers and sellers consider having legal counsel review these documents.
If you or someone you know would benefit from our expertise, by all means have them contact us. We’ll be happy to help. It’s what we do!