Contingency Contracts
Today, yet again, I had a Buyer's Agent present an offer to purchase a home that one of my clients had listed for sale. The offer was contingent upon the sale of the Buyer's home. The offer was not a particularly bad offer, but the Buyer's Agent was asking for several things that were problematic for the Seller.
It is very common to have a contingency contract presented and there is nothing inherently wrong with selling your home to someone who is also trying to sell their home. The problems arise with the timing of the sale and what happens when another potential Buyer comes along and wants to make a 'back-up' offer.
In this particular case the Buyer's Agent presented a contract that had a closing date nearly 3 months in the future and they were requesting the Seller grant a 5 day response time if another offer was presented. Further, and of no particular relevance to the contingency, the Buyer was offering $50 for a 14 day Option Period. When you put it all together this was a very unacceptable offer. Lets investigate each point in detail.
First, lets consider the Response Period. This is the length of time that the Seller grants to the 'Contingent Purchaser' to remove the contingency. Naturally, it is in the best interest of the Buyer to have as much time as possible, but, this runs counter to the best interests of the Seller. If the Seller accepts a 'Contingent Contract' and another Buyer decides to present a 'back-up' offer the Seller may very well want to take the new contract. If the new contract closes quicker and does not have a contingency clause the new contract may represent a much more solid deal. If a new contract that is desirable is presented as a back-up to the initial contingent contract the Seller will be required, per the terms of the contingent contract, to give the contingent Buyer a period of time to consider the situation and remove the contingency provision. If the Buyer decides to remove the contingency provision the Seller will be required to continue with the sale of the property to the initial Buyer. When you consider the situation from the perspective of the new Buyer and the Seller the shorter the time where they are waiting for the initial Buyer to respond the better.
It is normal for a period of between 24 and 48 hours to be granted to the initial contingency Buyer to consider their options and decide whether or not to remove the contingency or release the Seller from the contract of sale. In some situations it would even be within reasonable bounds to grant 72 hours to the contingent Buyer. Periods of 4 or 5 days are blatantly unreasonable unless the contingent Buyer is outside of the United States, or has some specific situation that would require a longer term to communicate with the Buyer.
Next, let us consider the length of time until closing. In this situation the contingent Buyer was asking for approximately 80 days till closing. The reason for such a long time is that the Buyer was wanting to wait until they had sufficient time to sell and close on their home which was just now being placed on the market. In my opinion a contingency contract with a closing more than 90 days into the future is so fraught with unknowns that there is little reason to enter into the contract. In such a situation the Buyer probably should go ahead and place their house on the market and wait until they were under contract before they attempted to purchase another property.
The reality of the Real Estate business is that Agents and Brokers who work with Buyers search for available properties to show their Buyers on, among other criteria, the basis of availability. Properties that are under contract, whether contingency contracts or otherwise, represent a poor investment of time to show a Buyer since those properties most likely will be tied up and unavailable to the Buyer in the eventuality that the Buyer decides they want to purchase the property. Why waste everyones time showing properties that are already sold when there are plenty of properties that are on the market that are not under contract?
Due to the fact that the months of April, May and June represent the peak of the Buying Season the impact of a failed contingency that has a three month term during the peak season is that the Seller may very well miss the best opportunity to sell their home without a contingency. Asking a Seller to effectively remove their home from the market during the best Selling Months of the year should require that the Seller receive something of value for the risk that they are taking.
Now, lest consider the concept of a Buyer Premium. Any time a contingency contract is presented it is very reasonable to make the Buyer pay a premium for the priviledge of a contingency. The more the contingency requests that they Seller wait for a long time, and the more that the waiting time happens to be during the busy season of the year, the higher the premium the Buyer should pay. There are a couple of ways for the Buyer to pay a premium.
The first form of a Buyer Premium would be to hold fast to the list price, or otherwise limit the amount of discount granted during the price negotiations. The second form of a Buyer Premium would be to ask that the Buyer pay a larger Option Period fee to help compensate the Seller for the risk that they are taking. The third form of Buyer Premium would be for the Buyer to offer a much larger than normal Earnest Money deposit that was not contingent upon financing. Lets discuss each of these Buyer Premiums in turn.
The first form of Buyer Premium would be to limit the discount granted to the Buyer. Since any contingent contract is granted to assist the Buyer in having sufficient time to sell and close on their home it is usually done at the request of the Buyer. If the Buyer needs this level of patience on behalf of the Seller the Seller can feel comfortable that they are being generous. Most Sellers will refuse to accept a contingency that has a long window of time till closing because most Sellers have a sense of urgency to sell their property and taking a long time to close, with the very real potential for the deal to fall apart, is a big risk to take. Since most Sellers will not consider contingencies, especially long term contingencies, the Buyer is at a disadvantage and has a smaller selection of properties to choose from, there fore the law of supply and demand would apply.
The second form of Buyer Premium would be to require that the Buyer pay a larger than normal Option Fee for the property. Since Option Fees are generally applied to the purchase price upon closing the larger Option Fee does not really damage the Buyer presuming that they proceed with honest and diligent attempts to sell their property and remove the contingency sooner rather than later. While a normal Option Fee might be $100 the Seller may require that the Buyer provide an Option Fee of $500. If a normal Option Fee on the property might have been $250 the Seller may require an Option Fee of $1000. By the Buyer asceeding to such a large Option Fee the Buyer is signalling to the Seller that they intend to proceed with diligence to purchase the property as contracted.
Finally the Seller may require that the Buyer Premium be in the form of a larger than normal Earnest Money deposit that is not contingent upon a long term 'Lender Refusal to Lend' clause to return the Earnest Money. In other words, if the normal Earnest Money for the sale would have been $1,000 it would be reasonable for the Seller to ask for $2,500 to $3,000. In a normal situation the Buyer would have 20 days from the contract effective date to obtain financing and remove the Financing Contingency. In the situation described here the same time frame would apply making the Buyer have a larger amount at risk if they failed to close as intended in the Contingent Contract.
Of course, it is possible that the Seller is so desperate to sell that they will take any deal, grasping at straws, in the hopes that they can finally get rid of the property, but, unless such a mindset is present with the Seller it is wise to consider some form of Buyer Premium because the Seller truly is taking a risk. The Seller is effectively removing their property from the market during the term of the contingency and if the contingency contract does not close they will have lost valuable time.
I would welcome your comments.
Lee Thurburn - President of NetOffer, Inc.
972-470-5888
It is very common to have a contingency contract presented and there is nothing inherently wrong with selling your home to someone who is also trying to sell their home. The problems arise with the timing of the sale and what happens when another potential Buyer comes along and wants to make a 'back-up' offer.
In this particular case the Buyer's Agent presented a contract that had a closing date nearly 3 months in the future and they were requesting the Seller grant a 5 day response time if another offer was presented. Further, and of no particular relevance to the contingency, the Buyer was offering $50 for a 14 day Option Period. When you put it all together this was a very unacceptable offer. Lets investigate each point in detail.
First, lets consider the Response Period. This is the length of time that the Seller grants to the 'Contingent Purchaser' to remove the contingency. Naturally, it is in the best interest of the Buyer to have as much time as possible, but, this runs counter to the best interests of the Seller. If the Seller accepts a 'Contingent Contract' and another Buyer decides to present a 'back-up' offer the Seller may very well want to take the new contract. If the new contract closes quicker and does not have a contingency clause the new contract may represent a much more solid deal. If a new contract that is desirable is presented as a back-up to the initial contingent contract the Seller will be required, per the terms of the contingent contract, to give the contingent Buyer a period of time to consider the situation and remove the contingency provision. If the Buyer decides to remove the contingency provision the Seller will be required to continue with the sale of the property to the initial Buyer. When you consider the situation from the perspective of the new Buyer and the Seller the shorter the time where they are waiting for the initial Buyer to respond the better.
It is normal for a period of between 24 and 48 hours to be granted to the initial contingency Buyer to consider their options and decide whether or not to remove the contingency or release the Seller from the contract of sale. In some situations it would even be within reasonable bounds to grant 72 hours to the contingent Buyer. Periods of 4 or 5 days are blatantly unreasonable unless the contingent Buyer is outside of the United States, or has some specific situation that would require a longer term to communicate with the Buyer.
Next, let us consider the length of time until closing. In this situation the contingent Buyer was asking for approximately 80 days till closing. The reason for such a long time is that the Buyer was wanting to wait until they had sufficient time to sell and close on their home which was just now being placed on the market. In my opinion a contingency contract with a closing more than 90 days into the future is so fraught with unknowns that there is little reason to enter into the contract. In such a situation the Buyer probably should go ahead and place their house on the market and wait until they were under contract before they attempted to purchase another property.
The reality of the Real Estate business is that Agents and Brokers who work with Buyers search for available properties to show their Buyers on, among other criteria, the basis of availability. Properties that are under contract, whether contingency contracts or otherwise, represent a poor investment of time to show a Buyer since those properties most likely will be tied up and unavailable to the Buyer in the eventuality that the Buyer decides they want to purchase the property. Why waste everyones time showing properties that are already sold when there are plenty of properties that are on the market that are not under contract?
Due to the fact that the months of April, May and June represent the peak of the Buying Season the impact of a failed contingency that has a three month term during the peak season is that the Seller may very well miss the best opportunity to sell their home without a contingency. Asking a Seller to effectively remove their home from the market during the best Selling Months of the year should require that the Seller receive something of value for the risk that they are taking.
Now, lest consider the concept of a Buyer Premium. Any time a contingency contract is presented it is very reasonable to make the Buyer pay a premium for the priviledge of a contingency. The more the contingency requests that they Seller wait for a long time, and the more that the waiting time happens to be during the busy season of the year, the higher the premium the Buyer should pay. There are a couple of ways for the Buyer to pay a premium.
The first form of a Buyer Premium would be to hold fast to the list price, or otherwise limit the amount of discount granted during the price negotiations. The second form of a Buyer Premium would be to ask that the Buyer pay a larger Option Period fee to help compensate the Seller for the risk that they are taking. The third form of Buyer Premium would be for the Buyer to offer a much larger than normal Earnest Money deposit that was not contingent upon financing. Lets discuss each of these Buyer Premiums in turn.
The first form of Buyer Premium would be to limit the discount granted to the Buyer. Since any contingent contract is granted to assist the Buyer in having sufficient time to sell and close on their home it is usually done at the request of the Buyer. If the Buyer needs this level of patience on behalf of the Seller the Seller can feel comfortable that they are being generous. Most Sellers will refuse to accept a contingency that has a long window of time till closing because most Sellers have a sense of urgency to sell their property and taking a long time to close, with the very real potential for the deal to fall apart, is a big risk to take. Since most Sellers will not consider contingencies, especially long term contingencies, the Buyer is at a disadvantage and has a smaller selection of properties to choose from, there fore the law of supply and demand would apply.
The second form of Buyer Premium would be to require that the Buyer pay a larger than normal Option Fee for the property. Since Option Fees are generally applied to the purchase price upon closing the larger Option Fee does not really damage the Buyer presuming that they proceed with honest and diligent attempts to sell their property and remove the contingency sooner rather than later. While a normal Option Fee might be $100 the Seller may require that the Buyer provide an Option Fee of $500. If a normal Option Fee on the property might have been $250 the Seller may require an Option Fee of $1000. By the Buyer asceeding to such a large Option Fee the Buyer is signalling to the Seller that they intend to proceed with diligence to purchase the property as contracted.
Finally the Seller may require that the Buyer Premium be in the form of a larger than normal Earnest Money deposit that is not contingent upon a long term 'Lender Refusal to Lend' clause to return the Earnest Money. In other words, if the normal Earnest Money for the sale would have been $1,000 it would be reasonable for the Seller to ask for $2,500 to $3,000. In a normal situation the Buyer would have 20 days from the contract effective date to obtain financing and remove the Financing Contingency. In the situation described here the same time frame would apply making the Buyer have a larger amount at risk if they failed to close as intended in the Contingent Contract.
Of course, it is possible that the Seller is so desperate to sell that they will take any deal, grasping at straws, in the hopes that they can finally get rid of the property, but, unless such a mindset is present with the Seller it is wise to consider some form of Buyer Premium because the Seller truly is taking a risk. The Seller is effectively removing their property from the market during the term of the contingency and if the contingency contract does not close they will have lost valuable time.
I would welcome your comments.
Lee Thurburn - President of NetOffer, Inc.
972-470-5888
posted by DallasFlatFee at 6:59 PM
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