Contingent Sales in a Buyer's Market

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I am buying a house. I signed the contract but the seller said contingent to sell until she buys new house?


Is that normal?

People do it. It's smarter to avoid the stress and complications of dealing with both at once, but there's nothing wrong with a contingency sale, so long as you agreed to it in the contract. Note that once you have a fully negotiated contract, you can't just add a contingency to it. It has to be agreed to before there's a valid purchase contract, and if it isn't agreed to before then, the question becomes, "What concessions is the other side going to demand for this?" There will always be concessions, but by waiting to negotiate them after the contract is complete, you lay yourself open to a suit for specific performance. You agreed to that contract. Just because you forgot something important (or if you intentionally omitted it), does not mean you can just tack it on as an extra consideration, any more than the other side can unilaterally change the purchase price by $10,000.

Contingency does add a lot of complexity and not an inconsiderable amount of cost and uncertainty to the process, however. The buyer shouldn't lock their loan until they know when you can fund it, and if they don't know yet, this means the loan sits and sits, perhaps increasing in rate and cost. If you lock it, it definitely increases in rate and cost. This is one of the few possible exceptions to locking a loan rate right away. There's also the issue of whether your seller will qualify for the loan on the new residence, or the purchasers of your buyer's soon to be former residence can qualify for their loan. Not to mention the anxiety of whether you will qualify for your loan in time for the transaction to close so they can get their home, and I can go on.

There are better alternatives for this situation, and if your agent didn't give you a couple of ideas during the negotiating process, well, let's just say there are better ways to handle it, especially right now when you cannot afford to irritate or lose any buyers.

A contingency sale is most often for the convenience of the seller. Whereas this is just fine in a seller's market where as soon as you put the sign in the yard you get three offers, a buyer's market is something else again. By being unwilling to accommodate a particular buyer, you may not get another offer. I understand very well not wanting to move twice, but the person who is willing to work a little harder or go through some extra inconvenience usually gets it returned in the form of cash when the transaction is over. How much is dependent upon the competition of the moment. It can make your property a lot more attractive, and mean a significant difference on the sale price, if you're willing to cooperate with the prospective buyer on not making them wait while you find a new property to buy. In a market like today's, where buyers have all the power, it can make the difference between selling for a good price and not selling at all. Any time you find yourself unwilling to do something a buyer wants, you run the risk that you won't get another, or won't get another as good.

Some buyers want contingent sales as well. Just as being willing to work with a buyer without a contingency can make you money, a willingness to grant a buyer their contingency can also make money. You can ask for a larger deposit, a higher sales price, or for the right to continue to market the property - so you've got this offer, or a better one if that comes along, as they are not likely to be able to perform when you drop that Notice to Perform on them because you now have a better offer. If they could have performed, they would have already performed. If they really need that contingency, they've got to deal with the same market you're dealing with!

When there is a strong buyer's market, if you are willing to do what it takes, you are competing more strongly for the available buyers. Similarly, if you as a buyer have fewer needs that you ask the seller to cooperate with, chances are excellent that you will get a better price. Remember that there is a reason why he who has the gold makes the rules - because he's going to be shelling a good amount of it out in order to get his way on other things.

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This page contains a single entry by Dan Melson published on April 26, 2008 7:00 AM.

First Time Home Buyer Assistance Programs: Locally Based was the previous entry in this blog.

Sellers Lending to Buyers and Selling the Note is the next entry in this blog.

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