Your home has been on the market for several months with little activity and no offers. Finally, you receive an offer. It's a fairly reasonable price, but there's a catch. It's a contingency offer, which means the buyer has to sell their home to buy yours. What do you do?
This actually happens quite often because many, if not most, buyers need the equity out of their home to put down on a new home. In addition, most buyers either can't or don't want to finance two homes at the same time.
Do you accept the contingency offer or wait for a non-contingency offer? There isn't a hard and fast answer. It depends on several things, but first, let me explain how a contingency contract works.
How Contingency Contracts Work
In a contingency contract, the buyer proceeds just like any other option contract with their option fee and earnest money. They also conduct their inspections and negotiate repairs just like they would on any other home purchase. The only thing different is an added addendum to the contract stating if the buyer's existing home doesn't sell by the date stated within the contract, the buyer has the choice to either
terminate the contract and get their earnest money back or
they can proceed with contract and waive the contingency on the sale of their home.
The seller might ask the buyer to agree to a "knockout" or "kickout" (same thing) clause. That means if another offer comes in while the buyer has the home under contract, the seller notifies the buyer. The buyer is then required to either waive their contingency and move forward with purchasing the home or they can terminate the contract and get their earnest money back. There may be language in the contingency addendum where the buyer has to put up additional earnest money to continue with the contract. Not surprisingly, sellers usually want the "knockout" language in the contract and buyers typically don't.
Again, every case is different, but here are some things I would consider before advising my sellers to accept a contingency offer.
Time Of Year
If it's the peak selling season (which I consider March through August), sellers are wary of accepting a contingency offer. They want their home on the market and available for anyone to buy every single day without it being encumbered by any type of contingency.
But what if it's in the off season, say November or December? In that case, it might not be a bad thing to accept a contingency offer. There are fewer buyers out looking for homes which means there are fewer opportunities to sell your home anyway. Of course, that also means there will be fewer opportunities for the buyer of your home to sell their home.
Will Buyer Agents Show The Home?
Some Realtors won't show a home with a contingency contract on it. They think it's wasting their client's or their own time. Here's why.
Let's say a client really likes a home with a contingency offer already on it and submits another offer. The seller will then contact the buyer with the contingency offer and notify them they have to decide whether to waive the contingency or terminate their contract and get their earnest money back. If the buyer agrees to remove the contingency and continue with the purchase, buyer number two has just helped the seller make a deal with someone else.
How Long Has The Home Been on the Market?
I would be reluctant to recommend a contingency offer to one of my sellers early in the marketing process, no matter what time of year it hits the market. Why not give your home a little time to be found by a buyer who doesn't need a contingency. Either they have the money to put down on a home, or their home is already under contract.
However, if the seller's home has been on the market for a long time and with little activity, why not roll the dice on a contingency offer. What can it hurt?
The State of the Real Estate Market?
You have to consider this, not only in the area of your home, but also where the buyer's home is located. If homes are moving briskly in both areas, it might give some weight to accepting the contingency. If the market is sluggish, a seller might be more inclined to accept the contingency thinking any offer is better than no offer at all.
How Aggressively Has The Buyer Priced Their Home?
If the buyer of your home trying to hit a home-run on the home they're selling, I wouldn't recommend taking a contingency. What are the odds someone is going to overpay for their home. If I'm the seller signing a contingency contract, I want to see the buyers be aggressive on pricing.
Are There Advantages To The Seller On A Contingency Offer?
A contingency contract is handled just like any other offer and that includes buyer inspections. That cost is paid by the buyer so the seller is having their home inspected for them. That allows them to address any issues that might have been called out by the inspector.
Buyers normally understand the seller is taking some risk in accepting a contingency offer. If not, their Realtor should educate them. In my opinion, the seller should be compensated with a good offer in return for taking that risk. If a contingency offer comes in with a low offering price too, I usually advise the sellers to just pass on it.
This is an intangible, but I believe it's very real. Once a buyer has a home under contract, they often develop an emotional attachment to it. They start to look upon it as theirs, so they'll try harder to make it work. They are focused on your home, and that's a good thing. That might encourage them to be more aggressive on pricing the home they're trying to sell.
In the Long Run, Does A Contingency Offer Benefit The Buyer or Seller?
In most cases, I'd have to say the buyer. The buyer has nothing at risk except the cost of the inspections and a small option fee. However the seller has their home appearing on the MLS as a contingency contract and that might deter showings.
Here's how my general philosophy about contingency contracts. Selling one home is sometimes tough enough and having to sell two homes just to close one makes it much more challenging.
The reality is, although most Realtors don't particularly like contingency offers we work with them all the time. As a listing agent, you just have to lay out the pros and cons to your seller and let them make the call.