Contingency Offers

Many people cannot afford to buy another home before they sell the home they are living in. This is where a contingency offer comes into play. A contingency offer simply makes the purchase of one home contingent upon the sale of another home by the buyer. The concept is simple, but there are many things to consider for both the buyer and the seller.

From the Seller's Point of view

Pros For the Seller To Accept a Contingency Offer

The buyer is probably already emotionally committed to the home. That means a lot in selling any home.

The seller's home will have already passed the buyer's inspections and the request for repairs (if any) has been resolved by the time the buyer's home sells. This expedites the sale process when the buyer's home closes.

The seller should get a higher price for the home than a non-contingency offer. The negotiated sale price on a contingency contract should be higher than an offer without any contingencies because the buyer has less buying leverage. Virtually all of the risk is on the seller side by taking their home off the market.

Cons For The Seller To Accept a Contingency Offer

The home has effectively been taken off the market, even with a "knockout" (as explained below).

From the Buyer's Point of view

Pros For The Buyer

They have their new home "locked in". They can sign a contract on the home they are selling already knowing where they are going. This makes it a seamless transaction for them.

Cons For The Buyer

They are probably going to pay more for the home than if they made a straight, non-contingency offer. The reason? They have less leverage because they are asking the seller to roll the dice with them on their ability to sell their home.

Contingency Considerations

Knock-outs (also called kick-outs) are Realtor jargon for a special amendment to a contract of sale allowing a seller to either force the buyer commit to purchasing their home (whether the buyer's home has sold or not) or force the buyer to terminate the contract without penalty and get their earnest money back. It is triggered when a a non-contingency offer comes in.

From the seller's point of view, this is fair because it allows them to continue to market their home even though it is under a contingency contract. The contingency buyer is going to get their earnest money back if they decide not to waive the contingency and agree to buy their home, so no-one gets hurt.

Of course, the buyer does not like kick-outs because now they are the ones taking the risk. What happens if they waive the contingency? The buyer gets their earnest money back, but now they have no-where to move when their home sells.

Other Contingency Considerations

What is the demand for the seller's home? As a listing agent, if we know we can sell it, why take it off the market? It is tough enough to make one sale, but for us to have to rely on two sales to make one sale is risky.
What time of year is it? If we are in Spring or Summer, we are probably not going to accept a contingency offer on any home we list. Those are the peak buying times, so why take a chance with one buyer trying to sell their home when (in theory) you will have many to choose from which may not have to sell their home first? Of course, if we are in the off-season, we are more likely to consider a contingency offer, but even then, we realize this is also the off-season for the buyer's home.
How is the buyer's home priced? If they are pricing it at the top, top of the market, why would our seller want to take their home off the market for the buyer to hit a "home-run"? We would rather just wait it out for the next buyer and tell the contingency buyer to come back to us when their home sells.
We expect the buyer's agent to tell us the buyer's home will sell quickly. We hear that on every contingency offer that comes to us, but we never let that sway us. We will personally go over and look at the buyer's home ourselves and see what condition it is in. Then we will run our own comparable marketing analysis to see if the home is priced in line with the neighborhood. And finally, we will find out how long it takes to sell a home in that neighborhood. If it is a 30 day average, that is one thing. But if it is a average of 90 days or later on market, that is another.

Real Life

When a home goes under a contingency contract in a typical market, most Realtors just stop showing them. I can tell you this from experience ... it is rare that one of our homes under a contingency contract is shown. Realtors just don't want to waste their time showing a home that their buyer might not be able to buy. And often, buyers will ask their Realtors not to show them any home that is already under a contingency contract. Why fall in love with a home you might not be able to buy? Realtors and their buyers would rather wait it out and see what happens on the home rather than take the time to look at it under a contingency. That might seem short-sighted, but again, this is real-life.

Tom Grisak Estate Homes Realtors, Inc - Texas License # 0329533

Your Realtors for Allentexas, Fairviewtexas, Lucastexas, McKinneytexas, Murphytexas, Parkertexas, Prospertexas