Case Study: Contingent Offers
The California Residential Purchase agreement has a number of buyer contingencies built in. They are:
Investigation
Appraisal
Loan
But sometimes a buyer might have to also sell their existing home in order to purchase the next one. When agents refer to “contingent offers”, the sale of the departing property is what they are most frequently citing. (Learn more about the other three contingencies here.)
On my advice, the sellers of 7301 W 87th Pl in Westchester accepted a contingent offer even though we were in a multiple offer negotiation. So why would I advise them to do that in this low inventory market? Why add another level of complexity?
That’s what this case study is all about.
HOW CONTINGENT OFFERS ARE STRUCTURED
There are a number of options on the form that is most often used.
The strongest contingent offer is one in which the buyer’s departing residence is already listed, in escrow and all their buyer’s contingencies are removed. By that I mean the contingencies for inspection, appraisal, and loan. In that case, everyone is just waiting for the sale of the buyer’s property to close and there is little risk compared to a standard sale. Maybe even less because presumably the contingent buyers need a place to live.
The next strongest contingent offers are those that are the same as the paragraph above except all the buyer’s contingencies for the down leg property aren’t removed yet.
Less strong are contingent offers where the contingent property is listed but not yet in escrow. And lastly are those that are not even listed yet.
Any guesses on what we accepted for this sale? It was the last example: contingent on a property not even listed yet.
For most contingent offers, the buyer will most likely want their sale on the contingent property clause to remain in place until that property sells. There is an option for the seller to be able to “bump” the buyer if they get a better offer from someone else. By bump I mean ask the buyer to remove the contingency for the sale on their property or the seller can cancel. Most often that’s a non starter for the buyer.
Also to be factored in is when the timelines in the standard contract start. Usually sellers want the timeline to start when the sign - as is normal, and buyers want the timeline to start when they get the contingent property into escrow.
WHAT I LIKE ABOUT CONTINGENT OFFERS
Usually the contingent buyer won’t negotiate as hard on price and we can get better terms for the seller.
And, once the contingent buyer’s property is in escrow, they are more likely to close escrow than someone who is renting and doesn’t “have to” move. On the other hand, unethical agents and dishonest buyers may tie up a property with a contingent offer and then when they know the sale of the departing residence is solid, go ahead and make offers on other homes and cancel the contingent sale. That’s why…..
WHO THE BUYER’S AGENT IS REALLY COUNTS
In the case of the sale of 7301 W87th Pl, I was very confident that the agent representing the buyers would:
Get their departing residence sold quickly, and
Play by the rules and close our sale.
Another important point to consider is…..
WHO IS THE LENDER?
In this case it was Wells Fargo and I know they do not generate pre-approval letters unless they have satisfied themselves as to the buyer’s creditworthiness.
Or as I have jokingly say about some of the pre-approval letters I receive from the no name lenders: They arent worth the digital paper they are not printed on.
AND LASTLY
The buyer’s “why”.
In the old days - and I don’t mean pre-pandemic (that’s the “before times"“), we used to talk about buyers being ready, willing, and able to buy. But I realized a number of years ago that understanding the buyer’s “why” is also very important. In the case of our contingent buyers for this listing, I found out that they had some connections to the neighborhood. That was a safer bet for closing than many of the buyers who came through who were generically looking all over the Westside. These buyers were what I call “Westchester Buyers” as in they specifically wanted to be in 90045.
HAPPY ENDING
As this sale played out, the buyers were able to get their departing residence in escrow within 10 days so it only extended out escrow for a few days which was perfect for my seller clients because they had not yet secured their up-leg and we didn’t want to be making any contingent offers in this market.