Last week’s blog discussed the increasing use of contingency sales where buyers’ offers are coming in “contingent” on the successful close of escrow of the buyer’s residence. This practice should not be automatically shunned as it has been over the past decade, but neither should it be readily agreed to without doing our homework.
This week I look at how the seller and their agent can diminish the negative risks of the contingency sale. Here are some basic safeguards that sellers can take to prevent getting stuck in a losing situation.
Mike’s best seller practices in order of safeguard:
- Should you take a contingency sale? The answer lies in the “honest” assessment about which home (yours or the buyer’s) has the greater likelihood to sell first. If your home has been languishing on the market with few or no offers and the buyer’s home that they need to close on will be a slam dunk quick sale, then certainly consider their offer. In all instances, you and your professional Realtor should do a thorough investigation as to the facts of the buyer’s current deal.
This includes interviewing the related parties to the transactions including agent, lender, and Title Company to determine the viability of the deal hanging together. Because if their deal falls apart, your deal falls apart and you get nothing (except angst) plus you‘ve lost time.
- Consider taking a contingency on a home if the buyer’s home is already in escrow, and through its “Due Diligence” (inspections) period including the negotiating period which can stretch out to 10-15 days or more. This assumes the buyer’s buyer does not also have a home to close on. You can allow this, but it’s very tricky. Much investigation needs to go into the quality of the other deals. This includes interviewing all other affected Realtors, lenders and title company officers and reviewing sale documents to make sure there’s no hidden hooks that can pierce the deal. I’ve been in escrows that have had up to four other homes that needed to close before my client’s home could close. These are possible, but harrowing and not for the faint of heart.
- Consider taking a contingency if the home just went into escrow and has not yet gone through its Due Diligence period. This can also work, but a few more questions need to be addressed about their property itself to determine if it should pass an inspection from the buyer. Again, this is a duty of you and your professional Realtor.
- Consider taking a contingency if the buyer’s home is NOT in escrow, if in your opinion and that of your Realtor’s, the buyer’s home is more likely to sell before yours. Is their home well priced, not unusually odd, in good condition, good location, etc. It’s still a matter of the odds. Your Realtor is usually best suited to make this determination.
Question: How long should you give the buyer’s to sell their home? It should be within one-two days of their closing. They will need to transfer funds to close on your home. The problem with #4 above is that it’s an unknown until they get their home in escrow. There should be a definite cut-off date.
Question: Can I accept another offer while under contract to sell to another? Usually not, unless you include a clause known as a “Contingency Release Clause.” This clause allows the seller the opportunity to take a new buyer’s offer after first giving the existing buyer the right to eliminate their contingency (72 hour right of refusal) and proceed to close escrow. This needs to be set up when the deal is first structured.
There are a number of other issues that should be addressed as well, but as you can see this is not something that should be either lightly accepted or rejected by a seller. There are a number of benefits in this package, but each deal needs to be weighed on its own merits. And as always, we recommend that buyers and sellers consider having legal counsel review these documents.
If you or someone you know would benefit from our expertise, by all means have them contact us. We’ll be happy to help. It’s what we do!