So, you have your home on the market and you received a contingent offer. Should you accept it?
That’s a tricky one. There are so many factors to consider when you receive an offer, and contingencies are no small part of that.
I’m going to present you with five questions you need to ask yourself when you receive a contingent offer to purchase your home. We’ll talk through a few different scenarios and by the end, you’ll have a clear picture of how to proceed, using your specific answers to these questions. Deal?
If this is your first time here, welcome! My name is Lindsay and I‘m a proud Anthem resident and your local REALTOR® with the Wise Move AZ Team at Realty ONE Group. On our YouTube Channel and blog we have a lot of fun talking about all things Anthem and real estate, and we would love to have you along for the ride.
What is a ‘Contingent Offer’?
Before we jump in, I want to be crystal clear about what I mean when I say ‘Contingent Offer’. There are a number of contingencies that come into play when we talk about real estate transactions. They can include inspection contingencies, appraisal contingencies, loan contingencies, and so on.
In this post, when I say ‘contingent offer’, I‘m specifically referring to a situation where the Buyer wants to buy your home, but their purchase of your home is contingent on the sale of their current home. i.e. they need to sell their existing home in order to close the deal on your home.
Things can get complicated… quickly!
I’m sure I won’t surprise anyone when I say real estate transactions can get messy all on their own. When we talk about contingent offers, we’re essentially intertwining at least two transactions together. As you can imagine this adds even more complication to the picture. The closer the closing dates are to one another the more complicated this can get.
Know what you’re getting into
I don’t want this to come across that I am opposed to Buyers making contingent offers, or against Sellers accepting contingent offers. I’m not. There is a time and a place for everything. My goal is just to make sure that all parties are walking into this with a complete and thorough understanding of the good, the bad, and the indifferent.
The Buyer Contingency Addendum
Thankfully, in Arizona, the wonderful folks at the Arizona Association of REALTORS® have put together a document called a Buyer Contingency Addendum. This two-page document was specially designed to protect buyers and sellers, where a contingent offer is involved. This document provides clear instructions on how the transaction will or will not proceed in a number of different circumstances.
I’ll make reference to Buyer Contingency Addendum throughout this video. That being said, I don’t want to bore you by reading the whole document here. If you would like a sample copy of the Buyer Contingency Addendum to read through, click here.
I wish I had a clear-cut formula, on whether or not you should accept a contingent offer on your house, but the truth is the answer is personal to you and your circumstances. It depends on so many unique factors. I am going to give you the tools to make an informed decision, but in the end it’s your choice to make.
Question #1: What Stage is your Buyer at in their Sale?
You need to know this right away and it may require some digging.
- Is their home currently listed for sale?
- Do they have a lot of interest?
- Are they already under contract?
- If so, when is the closing date?
- Are their buyers through the inspection period?
- Are their Buyers paying cash or getting a loan? What type of loan? Were they pre-approved?
- Could they qualify for the loan without their home selling?
- Is their Buyer’s purchase contingent? That would make it so that three transactions are intertwined.
- Do they want to close on both homes on the same day?
If the Buyer hasn’t even put the home on the market yet you should be more leery, than if they already have an offer on their home and it’s set to close next week. No one has a crystal ball to see into the future, so it’s really about mitigating the possible risks that their sale will fall through. Ideally, you want their Buyers to be through their inspection period and well on their way to closing.
Are these Buyer’s worth taking a gamble on?
Whatever stage the Buyer is at, you need to understand it inside and out. You need to know what could go wrong, what could go right, and what the most likely outcome is. Remember, if you accept this Buyers contingent offer, you are essentially taking your home off the market for them. You want to make sure they’re worth taking that gamble for.
Get all the facts
Some of this information you will be able to get directly from the Buyer Contingency Addendum. The Buyer Contingency Addendum requires the Buyer to disclose if they have an accepted contract on their current home. If so, they’re required to deliver copies of the purchase documents to you with their offer.
Your REALTOR® needs to speak with the agents on both sides of their transaction to get the full picture. They should also be calling the Lender. You need to read and understand all of the documents provided.
If you have questions, now is the time to ask!
Communicate, communicate, communicate
Communication is key when it comes to accepting a Contingent Offer. You need to be confident that you’re totally in the loop, and that any new developments will be made available to you right away. The further along the Buyer is in the sale of their current home, the better.
Question #2: What is the State of the Market?
Are you in a Buyer’s Market, a Seller’s Market, or a Balanced Market? If you’re in a Buyer’s market, you may be more inclined to accept a contingent offer. On the other hand, if you’re in a strong Seller’s market, with limited supply and high demand, then you may be less inclined to take your home off the market for a contingent offer.
Perspective and an understanding of the current market is essential. You don’t want to lose a quality buyer because you were hoping someone better would come along, but you also don’t want to accept their offer and receive a full-price cash, quick-close offer the next day. You need a rough idea of how many buyers are in the market for a home like yours.
But wait, there’s more
Just to add even more complication to this, you want to have a basic understanding of the market where the Buyer is selling their current home. Their Listing Agent should be able to provide a professional opinion on this, so just keep the communication flowing.
Question 3: What’s the Interest Level in your Home?
You might be thinking this is awfully similar to the last question, but it’s not and here’s why: Even in a Buyer’s market you can get a bidding war on a home that stands out. It may have a one-of-a-kind view or be priced really competitively. Alternatively, if your home can’t compete with the other homes on the market, you may have trouble selling it, even in a Seller’s market. For example, if you have a home that requires extensive structural repairs in an area where that’s not common, it may take longer to sell. Or even if it’s very comparable to your neighbors homes, but is grossly over-priced, chances are you’re not getting a lot of interest.
I want you think about how much activity you’ve had on your home, how long its been on the market, and what the showing feedback has been like. All of this should start to paint a picture, for you. If your home is very desirable with lots of interest, you may not need to even consider a Contingent Offer. On the other hand, if you’ve had little interest, or if the feedback hasn’t been great, you may be more inclined to accept a contingent offer.
Question #4: What is their offer like otherwise?
Okay, so we know that their offer is contingent on the sale of their home, but what does the rest of the offer look like?
- Are they offering a fair amount of money?
- Does the closing date work for you?
- Are they getting a loan or paying cash?
- Have they added any terms or conditions that make you uneasy?
Read the whole offer carefully with your agent, and make sure that you understand it inside and out. I recommend having your agent put together a net sheet, so that you can see what you’ll be pocketing at the end of the day.
If the offer looks really good on paper, with the exception of the contingency, you may be more inclined to accept it, or at least counter it. On the other hand, if the other terms their proposing don’t work for you, you may not want to work with them.
Question #5: What happens if their Sale Falls Through?
Last but certainly not least, I want you to do a little bit of ‘worst-case scenario’ planning. Contingent offers can be more precarious and can be more tricky for their Buyers and Sellers to navigate.
- What will happen to you if their sale falls through?
- Will they be able to get another offer in place quickly?
- Will you wait for them?
- Will you put the house back on the market?
- Will they be able to remove their contingency?
- Are you in a hurry to move?
- Are you relying on the proceeds of this sale to buy your next home?
- Will you be buying your next home contingent on the sale of your current home?
Is your head spinning? I’m so sorry, I don’t want to overwhelm you, but I want you to talk through all of the possibilities and understand just how intertwined the transactions become when you accept a contingent offer.
Take your Time
Take some time to reflect on these questions alone and with your REALTOR®. We all bring unique perspectives to the table, and it’s valuable to see the coin from both sides.
Know that this is not an easy decision to make. You don’t want to pass up an otherwise good offer, but you also don’t want to miss your chance at a much more straightforward transaction. In this situation I recommend writing out a pros and cons list, and thinking about the possible and probable outcomes of this situation.
So, there you have it! What do you think? Are you ready to make the tough decision about whether or not you should accept a contingent offer on your home? Don’t forget to click here to grab your sample copy of the Buyer Contingency Addendum. Reading through that document, coupled with the questions I’ve posed in this blog post, you should be in a good place to make a decision.
Enjoy those and I’ll see YOU next Thursday!