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The Pros and Cons of a Home Sale Contingency

Richard Montgomery on

Dear Monty: Our home just went up for sale 10 days ago. We have had two showings. We just received an offer for our asking price, which is acceptable. We are hesitating because the buyer has a home to sell. We asked our agent about the buyer's home, but the offer came from another company. Our agent had no information about the house. What is your opinion on the best way to proceed?

Monty's Answer: My experience has been that a buyer with a "selling current home" contingency has failed more often than other contingencies. Further, a primary cause is a buyer who justifies the purchase of the new home with an unrealistic expectation of their old home's value. One could interpret the buyer's actions like this: "Yes, I will pay $350k for your home if I can get $240k for my $200k house."

CONSIDERATIONS IN ACCEPTING A HOME SALE CONTINGENCY

MARKET CONDITIONS: A sellers' market, a buyers' market and a balanced market are the contenders. The conditions in a hyperlocal market are far more sensitive and can change quickly with few transactions. Both parties need data on homes sold and competing homes in both neighborhoods to make informed decisions.

THE COMPETITION: The primary factor with competition is market absorption rates. If a defined market has 15 homes for sale between $300k and $350k, and that market is experiencing two sales a month at that price point, it may take over a year for those homes to sell. The reverse would be true if two homes were for sale and the market absorbed two a month. You need to know how many similar homes are for sale and how many the neighborhood market absorbs per month.

HOME CONDITION: Homes are either brand new, like new, in good condition, below average or in poor condition. If a home sale contingent is part of an offer, you want to see evidence of what kind of condition the home is in and at what offering price.

BUYER MOTIVATION: Homebuyers often have motivations that affect what they will pay for a home. A home will be worth X to one buyer and Y to another. There is no one price for any home. Suppose the motivation is subject to receiving an above-market price without a written sliding reduction scale built into the listing. In that case, this reduces the chances of closing. Ask your buyer about their selling strategy.

SELLER MOTIVATION: Like homebuyers, home sellers have the same data available for their homes. If the data suggests your home is over premium, that can affect your buyer's pricing strategy. Your home is fresh on the market. Here is an article about seller strategies that you may find helpful.

 

THE PROS AND CONS OF A HOME SALE CONTINGENCY

Pros: Researched and implemented correctly, it can lead to a successful sale.

Cons: Absent the above data, a seller can lose a buyer with no home to sell and considerably extended market time.

When a well-drafted contingency contains the right for the seller to continue marketing with a "trigger" clause, it strengthens the chances for both parties. The trigger clause gives the contingent buyer 24 to 48 hours to eliminate the contingency. With the information written above, both parties can make informed decisions.

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Richard Montgomery is the author of "House Money: An Insider's Secrets to Saving Thousands When You Buy or Sell a Home." He advocates industry reform and offers readers unbiased real estate advice. Follow him on Twitter at @dearmonty, or at DearMonty.com.

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