What is a contingency offer and should we accept it?
A contingency is an offer or a contract that is dependent on the Buyer being able to sell a property they currently own before they can consummate the purchase of a new home.
Whether you’re on the Buyer side or the Seller side, there are serious implications to consider before you make or accept a contingency offer.
The Buyer Side of a Contingency
A Buyer has a house to sell. No one has made an offer yet and no one is interested, but they go house hunting to see where they might like to move when the time comes. They find a property they love and don’t want anyone else to buy it. They can’t afford it until the house they currently own is sold, so they make an offer contingent on the sale of their present property. There is often a time limit (one to two months?) put in the offer for them to be able to ‘perform’ on the contingency, and if their house hasn’t sold, their offer falls to the wayside. Unless the contract says otherwise, they get their earnest money back, and Seller’s house goes back actively on the market.
Why this isn’t a good idea for a Buyer
Anxious to purchase the house they’ve found, Buyer #1 offers more than they might have otherwise to make it more appealing to the Seller. In their desire to secure the new residence, oftentimes they will drastically lower the price of the home they have for sale to get it sold quickly, and will make concessions they otherwise wouldn’t have made if they weren’t rushed to move. These factors could add up to a potential loss of tens of thousands of dollars to Buyer #1.
In addition, the offer usually contains a First Right of Refusal with a time limit – usually forty-eight to seventy-two hours. What that means is that if Buyer #2 comes along and makes an offer on the same house, then Buyer #1 has that amount of time to remove their contingency. In other words, they have to prove in writing that they can now buy the house without having to sell the one they own or they’ll lose out to Buyer #2. If they could have purchased without the contingency, they wouldn’t have put it in their offer to begin with. It has gained them nothing.
If Buyer #1 had waited until there was a solid contract on their house before they made an offer, they could have saved themselves a lot of money. In addition, if the house they want is still on the market after they get an offer, they can probably get it at a lower purchase price. More importantly, the house you think you want is not always your best option.
The Seller Side of a Contingency
Seller’s house is actively on the market and getting showings. A potential Buyer has seen your house and loves it, but they have a house to sell first. They make an offer contingent on the sale of their current home, which means they can’t really buy yours until their house has closed.
Why this isn’t a good idea for a Seller
In the state of Colorado, when you accept a contingency offer, your listing on the MLS has to be changed to reflect that there is an offer on your house. When that happens, showings will generally stop completely as potential Buyers don’t want to compete with someone who already is under contract. The house is essentially off the market while you, the Seller, wait for the potential Buyer to sell their own home.
If you’re lucky enough that someone else wants to make an offer, you have to wait the amount of time specified in the original contract (often seventy-two hours) to see if Buyer #1 can ‘perform’ and buy your house without having to sell. If they could do that, in all likelihood, they would have done it by now. You lose precious time and money waiting for someone else to market their house while you wait and your house isn’t showing. I can see no advantage for either Buyer or Seller. Truth of the matter is, if your house is still available when the Buyer’s house sells, they can then make an offer with a more solid ability to purchase.
When you should consider accepting a Contingency Offer
If the Buyer who is making an offer on your house has a solid contract on the house they have to sell, then you should consult with your Realtor about accepting their offer. Although there are never any guarantees in real estate, your Realtor can determine the strength of the contract your potential Buyer has on their house. If it appears solid, it might be safe to move forward in accepting such a contingency offer.