Should I accept a contingent offer when I sell my home? | Mortgage Rates, Mortgage News and Strategy : The Mortgage Reports

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Should I accept a contingent offer when selling my home? That’s a common question for home sellers.

What contingencies should you expect?
How can a contingency affect your sale?
Some contingencies can be red flags

We would all like to market homes neatly and quickly but in practice, it doesn’t happen that way. In virtually all cases, sellers will accept contingent offers or their property will be unsold.

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What’s a contingency?

Attorney John Reilly, in The Language of Real Estate, says a contingency is “a provision in a contract that requires the completion of a certain act or the happening of a particular event before that contract is binding.”

We see real estate contingencies all the time. Johnson offers to buy a home for $300,000 with 10 percent down. Johnson must get $270,000 in mortgage financing. The purchase offer will outline how the transaction will be financed. It’s also likely to have financing contingencies.

First, Johnson will have a set time to apply for financing, say five or 10 days. If Johnson does not apply within the time limit, he is “out of contract” and may lose the home to another buyer. If he has deposited “earnest money,” he may lose that as well (more on earnest money later).

Second, Johnson’s offer will likely say there’s no deal if required financing is unavailable. If he or his agent is smart, the wording will be specific — not just an approval for any loan, but one he wants and can afford — for instance, a 30-year fixed-rate loan with 10 percent down at a rate not exceeding 5 percent.

If the best offer he gets is a “non-prime” with 30 percent down and a 10 percent rate, Johnson is off the hook.

How to deal with financing contingencies

if you have offers to choose among, favor the one with a pre-approved loan over one with just a pre-qualification or no attempt at financing at all. Offers (unless they are all-cash) with no financing in place or attempt at prequalification might as well be written on Kleenex.

A pre-approved buyer is less likely to require a burdensome financing contingency — the only possible problems being a sudden spike in rates, a drastic change in financial status or your property not meeting the lender’s requirements.

Home inspection contingencies

Another common contingency concerns a home inspection. A contingency might say that a buyer has the right to a home inspection. Such language by itself does not say that the buyer can require repairs or get out of the transaction if big problems are found. The buyer must order and review the inspection within a certain number of days, or waive it.

A better inspection contingency will explain what happens if a material problem is discovered. It can also limit the seller’s obligation to make repairs. It might say that if the cost of repairs is greater than 2 percent of the sale price, the seller can withdraw from the transaction without penalty.

How to deal with inspection contingencies

One way to avoid ugly surprises is to commission your own inspection. You can either choose to fix the problem or price your home with the understanding that the problem exists and the price is “as is.” The downside is that once you become aware of an issue, you have to disclose it.

The upside is that the buyer may waive the inspection once you provide yours. And you avoid eleventh-hour problems that kill the deal, just when you thought you’d be moving.

Typically, inspection contingencies require you to correct smaller items uncovered by the inspector, for example, anything under $1,000. But more expensive issues bring in additional options. You can agree to make the repair. You can kill the deal. or you and the buyer can renegotiate the price.

Contingencies involving the sale of a home

Still another common contingency is a transaction which is dependent upon the sale of the purchasers’ current home. The buyer might say, “I’ll buy your property, but first I need to sell mine.”

Since we don’t know when the buyer’s property will sell, it’s possible for the seller’s home to be tied up for weeks and months. Worse, maybe the buyer’s sale is contingent on the sale by his or her purchaser. You are taking a risk by removing your home from the market to accommodate someone who may never be able to close the deal.

Dealing with home sale contingencies

You have to protect yourself in this situation. The risk is too high. In a situation with a buyer’s sale contingency, insist on a so-called “kick-out” clause.

This means that you retain the right to market your property, and if you get a better offer, you can accept it. However, you must give the current buyer a right of first refusal. That means the buyer gets a limited time (48 hours is common) to remove the contingency and close.

If the current buyer does not remove the contingency, you can terminate the agreement, return the buyer’s deposit. and sell the home to the buyer who can close without a lengthy and indeterminate escrow. You must disclose that the property is under contract and that there is a contingency involved.

Addendum

While purchase agreements are routinely filled with contingencies, standardized forms often need additional language for individual transactions. Such additional language is called an addendum (or “addenda” if there are several additions to be made).

Some addenda are clarifications designed to make sure that the terms of the sale are clear. They might explain who gets the outdoor swing set. Or they can say that the sellers have the right to take the dining room chandelier.

An addendum can also create a contingency. For example, an offer might say that there must be a home inspection which is “satisfactory” to the purchaser. What does “satisfactory” mean? According to Reilly, “Courts will try to impose standards of good faith and reasonability” if the matter is in dispute.

Getting it on paper

Just as real estate contracts must be carefully written, contingencies should also be drafted with great caution. Real estate brokers, for example, use contingency forms written by attorneys.

The reason for such care is that it’s easy to write contract language which is debatable. If there’s a dispute regarding what a contingency means then whoever wrote the agreement generally loses. Attorneys are trained in the art of legal writing, a craft where words have specific meanings.

Should I accept a contingent offer?

Whether or not a seller should accept a contingent offer depends on the facts and circumstances for each transaction. The goal is to sell the property with the best price and terms and to do that, owners will likely be required to accept certain contingencies.

It’s fairly common to find offers which include a number of standardized contingencies. For example, buyers might want to limit their interest-rate exposure to the prevailing market rate at the time the offer is made. This is good for the buyer and it’s also good for the seller. If you’re a seller, you don’t want to waste precious marketing time with a buyer who cannot qualify for financing.

However, an offer with no mortgage pre-approval — but a financing contingency, tiny down payment and low-interest rate limit — should make you nervous. An offer stating that the inspection must be “satisfactory,” without defining “satisfactory” could be opening up a can of worms you don’t want. Specifics are better than generalities.

Earnest money

You can make contingent offers more palatable by requiring “earnest money.” Earnest money is a deposit the buyer pays into escrow. If he or she fails to close the deal for any reason other than those listed in their contingencies, you get to keep it to compensate for lost time/money/marketing ability.

The riskier the offer (as in no pre-approval, the need to sell another home, and a picky inspection clause), the more earnest money you should demand.

In some cases, like a very long escrow and a home sale contingency, you can even make the earnest money requirement non-refundable. Meaning that if they fail to close for any reason, you still get compensated. This might happen when a buyer repeatedly requests extensions for closing. You can say yes but charge for the privilege.

What about non-contingent sales?

In hot markets where sellers receive multiple offers, buyers will sometimes try to get an edge by offering a “non-contingent” contract. It might also be an all-cash offer, so financing is not an issue. In such situations, sellers will want a solid deposit as well as a careful review of the offer.

You’ll also want to make sure that the buyer has the cash to close — ask them to supply copies of bank statements before you take your home off the market.

The world of contingencies is complex. Both buyers and sellers should speak with real estate brokers for more information. Additional help is available from local attorneys who specialize in real estate.

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