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A Contingency Offer Is a Lot Better Than No Offer At All

Written by on Monday, 30 June 2014 2:29 pm
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Now that the market has slowed a bit -- i.e. returned to normal -- contingency offers are more common and, I would argue, more palatable than they have been during the past few years.

By contingency offer I mean an offer to purchase that comes from a buyer who still has to sell his house (or some other property) in order to perform. His purchase offer is contingent on the sale and close of escrow of his property. There are many other types of contingencies, and in that sense just about every purchase offer is contingent. Some are contingent on the close of escrow on a property already sold. Most offers are contingent on the buyer receiving full loan approval. Most are also contingent on inspections yielding satisfactory results, or fixing things that need to be fixed. Nonetheless, in the business, a contingency offer usually means one where the buyer has not yet sold his property.

There are certainly situations where it makes sense to entertain and perhaps accept a contingency offer. It certainly makes sense when the number of potential buyers is not large. This could be because of general market conditions, or it could be attributed to the fact that the property you want to sell has limited appeal, or maybe it is just in a price range out of reach to most. In any of those conditions it makes sense to try to work with the proverbial bird in the hand.

Naturally there are factors to take into consideration. A primary one is the salability of the buyer's property. What one especially wants to know is whether it is or will be priced right. If the property is local, a listing agent should be able to get a good fix on this. If it is out of the area it will probably be necessary to establish contact with a knowledgeable broker in that locale. Some have suggested the strategy of insisting that the buyer's listing price be reduced by a certain amount if a sale has not occurred within a specified amount of time.

Another consideration that has to be faced when considering a contingency offer is that you don't want to lose potential market exposure while you are waiting for the buyer to try to sell his house. The purchase contract (RPA-11) produced by the California Association of REALTORS®(CAR) provides a means for dealing with this.

There is a provision in an addendum to the CAR contract that allows for the seller who is accepting a contingency offer to keep his property on the market, with the provision that, should he receive another acceptable offer, the contingency buyer has a specified amount of time (usually 72 hours) to remove the sale contingency, to remove the loan contingency, and to do whatever else will satisfy the seller. Usually the latter means demonstrating that he, the contingency buyer, has the ability to close even if his house isn't sold.

Frequently this condition is characterized, albeit inaccurately, as a 72-hour first right of refusal. Regardless of the terminology, the point is that the contingency buyer has that amount of time to, as it were, fish or cut bait.

Sellers or their agents have often been reluctant to be in this "first right of refusal" situation, because they felt that no other agent would show their property. Part of the reason for this concern was that the property would no longer be listed in "active" status in the multiple listing system (MLS), hence buyer's agents would not even see it when they did a computer search. In some MLS systems (such as California Regional MLS) there is a "middle ground" known as back-up status which means the property is still on the active market and the seller is soliciting further offers. Good agents who are looking for property will not ignore such listings, but will call the listing agent to find out what the situation is. Many would be willing to write a back-up offer, knowing of the contingency situation.

Needless to say, there are other factors to be considered as well when entertaining a contingency offer, but these are the primary ones. One thing is for certain, there can certainly be worse things for sellers than a contingency offer -- no offer at all.

Bob Hunt is a director of the California Association of Realtors®. He is the author of Real Estate the Ethical Way.

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1 comment

  • Comment Link Cheryl Nelson Tuesday, 01 July 2014 9:29 am posted by Cheryl Nelson

    In Florida the kick out clause is usually required in any contingency offer where the buyer has to sell his property. That way agents will continue to show the property and it gives the buyers a chance to still purchase within the time limit.

    I never like to suggest a contingency offer to my buyers because often the contingency is usually about 45 days and they stand to lose their earnest deposit if they do not purchase. However, in some cases, like low inventory, a contingency can work if the buyers property is priced competitively.

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