Is contingent-sale real estate offer worth the risk?

How sellers can protect themselves

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Jun. 20, 2011

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How sellers can protect themselves

Dian Hymer
Inman News™

Some sellers are fortunate and receive an all-cash, contingency-free offer. But most residential purchase offers include contingencies for property inspections, and appraisal and loan approval. Buyers who need to sell a home before buying might include a contingency for the sale of their home.

Until a transaction is closed, there is risk involved. For example, buyers have been known to make a big purchase, like a new car, just before closing. If the lender does a pre-closing credit check, the new car purchase could put the transaction in jeopardy even though the buyers were previously approved for the loan.

Even an all-cash offer can be risky if the money is coming from overseas and never shows up. An offer without an inspection may come back to bite you if defects are discovered after close that could have been negotiated before the transaction was complete.

An offer made contingent on the sale of another property has a higher risk factor than an offer from buyers whose funds for the down payment and closing costs are liquid. For this reason, many sellers won't accept them.

HOUSE HUNTING TIP: Don't turn down a contingent-sale offer just because it's contingent. Some are riskier than others. For example, if the buyers' home is pending sale and all contingencies are removed, it might be worth going forward with it, particularly if your home has been on the market awhile with no offers.

Contingent-sale buyers are often willing to pay more than "noncontingent" buyers. The premium is to entice the sellers into working with their offer.

Sellers who accept an offer contingent on the close of another property sale should be sure to request a copy of purchase contract for that transaction and verification that contingencies have been removed.

Ask your agent to talk to the buyers' agent to get permission to talk with the buyers' lender to see if there are any anticipated impediments to the close of the sales. Since appraisals have been an issue recently, an offer from a contingent-sale buyer would be more attractive if the appraisal contingency on the sale of their home had already been removed.

Make sure that your contract with the contingent buyer includes a clause that requires them to notify you in writing if their deal is canceled for any reason. You should then have the option of canceling the contract, if you want to. If the buyers have a backup offer, you might choose to continue with the transaction.

One factor to consider when weighing the merits of a contingent-sale offer is the salability of the property. This is particularly so if the buyers' home is not yet on the market. If your home isn't selling, it might be worth considering a contingent-sale offer from buyers whose home is likely to sell quickly. It could be located in a more coveted area, or be in a more easily salable price range.

With a contingent-sale offer, if the buyers' home doesn't sell, they don't have to buy your home. The deal is canceled and you look for a new buyer. This can be a waste of time if the buyers price their home too high for the market. Include a provision that your agent must approve the list price of the buyers' home.

Sellers who accept a contingent-sale offer can gain protection by including a clause in the contract that permits them to continue to market their home for a backup offer. A release clause or kick-out clause should also be in the contract.

THE CLOSING: A release clause allows the sellers to notify the buyers that they have a certain time (often 72 hours) to remove their contingent-sale stipulation or withdraw.

Dian Hymer, a real estate broker with more than 30 years' experience, is a nationally syndicated real estate columnist and author of "House Hunting: The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide."

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