Jacki Shafer | Phone: 502-643-7653
Address: 9911 Shelbyville Road, Suite 100, Louisville, KY 40222

Jacki's Real Estate Blog

15
Nov 2011

Taking The Mystery Out Of The Real Estate Contingency Contract

It’s a story of The Good, The Bad, and The Downright Sad

Contingency contracts have their place in the real estate world, but you need to weigh your options carefully before either making a contingent offer or accepting a contingency.

What is a contingency contract?  Julie and Realtor Suzy

Let me tell you by way of a story: (And it IS just a story, but thousands just like this one are played out every day in Lousville, KY…)

Julie was driving home from church one sunny Sunday afternoon.  Off in the distance she noticed big red balloons swaying back and forth on a breeze, attached to an OPEN HOUSE directional sign in a subdivision close to her home.  She later recalled that she “felt compelled” to pull in to the neighborhood and check it out.  She had always liked the area and often dreamed of living there.  So when she walked in and found herself falling head over heels in love with the place, the wheels started turning, and before she knew it she was sitting down at the kitchen table with the Realtor making an offer.  (For the sake of this story we will name the Realtor Suzy.)

The offer was written “contingent upon the sale and closing of buyer’s home located at 675 Anywhere Drive.”  Julie had to sell her condo before she could purchase her dream home.  She had just painted the interior in neutral colors and added new hardwood to the foyer.  An interior designer friend of hers helped her decorate, so she was absolutely confident of a quick sale.

Even though something was gnawing at her that maybe this was a little bit of a gamble, she wanted this house!

Listing Agent Suzy explained to Julie that the Sellers, Mr. and Mrs. Thompson, would most likely want to keep their home in “Active” status on the local multiple listing system (MLS), and give her a 24-hour first right of refusal.  She explained that the Sellers would continue to actively market their home, and if another offer came along and was accepted by the Thompsons, Julie would be given “first dibs” on it.

In other words, once Julie receives the notification of another offer, she has 24 hours to remove the contingency and move forward with the sale or she could cancel the contract.  Julie then asked all the right “what ifs” and Suzy explained what her options would be in the event her home hasn’t sold if another offer came along:

Option #1

If she intended to go forward with the purchase of the home regardless of whether or not her condo sold, she would need to meet with her lender right away and get approved for a bridge loan (defined in more detail in a later blog).  Julie would need to qualify for this short-term loan that would help her buy the new house before the proceeds were available from the sale of the condo.  In the event the clock were to start ticking on the 24-hour first right of refusal, this commitment letter would need to be in hand.  She could then remove the contingency on the sale of her home and move forward with her plans to buy the new home.

Option #2

She could pay cash for the new home.  (Not in the cards for Julie).

Option #3

If she didn’t snag a buyer in that 24-hour time period, she could release herself from any obligation to buy the new home.  All parties would sign a release of contract and Julie’s good faith money would be returned to her.

    At this point Julie is wondering why butterflies are playing field hockey in her stomach, but she moves on with the offer, still confident her home will sell quickly.  And since she didn’t have a Realtor of her own, she smiles at Suzy across the table writing the offer and tells her she can list her condo if the Sellers accept her offer.

    Julie knows her power to haggle over price is limited due to the fact she has a home to sell before she can close on the Sellers’ home.  She is not overly concerned about that because she knows the neighborhood well and already considered the listing price on the home a good value.  When she overheard other shoppers at the Open House talking about what a great bargain it was, she decided she didn’t want to take a chance of losing it.  She offered the Sellers full price.

    The Offer

    Offer written, the Realtor Suzy closes up shop on her Open House and calls the Thompsons to announce she wrote an offer on their home and will wait for them to drive home so she can go over all the terms and conditions with them.

    The Thompsons are elated.  They saw the address of Julie’s condo and knew they typically sold quickly.  They accept the contingency offer, giving Julie 90 days to sell her home.  Especially in a buyer’s market they felt lucky to get a full-price offer.  They did a happy dance.

    Suzy the Realtor called Julie with the good news.  Squeals of happiness could be heard on the other end of the line.  Suzy was feeling pretty darn good about herself:  she had a very productive day!

    Fast forward to the-all-too-predictable end of the story:  Julie’s condo never sold.

    … and she couldn’t qualify for the bridge loan

    … and she certainly didn’t have the funds to pay cash for the home

    The Thompsons lost 90 days of prime selling time.  By this time the listing on their home had become “stale” and they ended up selling their home six months later at a much lower price.

    And nobody was very happy with Realtor Suzy.

    So goes another sad saga of the contingency contract that fell apart.  So what are the lessons learned here for the SELLERS?  The first one that springs immediately to mind is:

    TAKE TIME TO DO YOUR HOMEWORK:

    Don’t let the purchase price offered color your judgment.  Even a full-price offer, if contingent upon both the sale and closing of the buyer’s home, is not worth anything if the buyer fails to remove the contingency.  Take your time.  Ask to see the buyer’s home before making any decisions.  Ask for a very thorough market analysis on the buyer’s home and ask what price the buyer will be asking for the home.  If it’s not aggressively priced it is probably not a good idea to take the contingency.

    EYES WIDE OPEN, KNOW THAT SHOWING ACTIVITY WILL SLOW DOWN:

    Even though your home may remain in “Active” status (at least that’s how our Greater Louisville Association of Realtors MLS system operates.  Check your local MLS for their policies), it must be disclosed that there is a contingency contract in place.

    Put yourself in a buyer’s shoes.  How excited would you be about considering a home that has a 24-hour first right of refusal in place?  Buyers know they are taking a gamble when they take the time to make an offer on your home.  That first buyer with the 24-hour first right of refusal may remove that contingency after all, leaving them broken-hearted.  If buyers have a lot of other homes from which to choose, oftentimes they will choose one that does not have a contingency.

    YOU HAVE NO CONTROL:

    You are left guessing as to how long it might take the buyer to sell their home.  And like we have seen in this tale of Julie and The Thompsons, if the buyer is not able to sell by the time the contract expires, you’re back to square one.

    And what lessons can we learn from the mistakes Julie made?

    (… that’s a great subject for a later blog !!)

    Just Know This:  “The Lesson”

    Not all contingency contracts are fraught with problems or doomed to failure.  I have written hundreds of them over the years.  You just have to weigh the pros against the cons, do your due diligence, hire a professional Realtor who will empower you with information, and make your own informed decision on whether to accept a contingency or wait for a non-contingent offer to come your way.

    Before you sign a contingency contract, talk to a Realtor.  Feel free to leave a question or comment below about your experiences with contingency contracts.  Or give me a call (502-643-7653).  I am here to help you.

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