Here is Part 2 of my article on restoring a normal housing market – and increasing the inventory for sale – by returning to contracts with buyer and seller contingencies. These are contracts contingent on buyers selling their existing home, and sellers finding a suitable replacement home.
Want More Inventory? Create More with Contingencies – Part 2
Contingencies begin in the listing preparation, when agent and seller determine the price and conditions that the seller is willing to accept in a contract offer. This is the time for the agent to explain the good reasons to accept a sales contingency if the buyer makes an offer asking for one.
What about the Buyer?
Every seller of course prefers a cash buyer, and cash has always been king. But buyers making an offer based on cash are fully aware of their advantage, and typically they can insist on a timetable that meets their convenience, not the seller’s. They have no reason to grant the seller a contingency based on the seller’s finding a suitable replacement home.
Time is money, and timetable conditions in a contract will usually affect the net price in some way. When both buyer and seller require a contingency (one for the sale of an existing home, the other to secure a replacement home), then all other things being equal, the money adjustments can be a wash.
In terms of negotiation on timetable, more give-and-take is likely from a well qualified buyer with financing than from a cash buyer, and this may constitute the better offer for the seller.
Without contingencies the better qualified buyers can’t enter the market for the medium to higher-end price points. These are the very buyers who have a solid history of making mortgage payments and building equity over time. And these are the the very properties that are typically outside of an investor’s portfolio, or the reach of first-time buyers.
Even at the affordable end for first-time buyers, a contingency-based offer from a more qualified buyer with a good lender can easily be more attractive than an FHA loan with more stringent requirements. And as cash buyers are disappearing, so too young people are increasingly saddled with debt – from student loans and car payments to consumer debt – and finding it harder to enter the market.
What goes around comes around, and sellers are usually buyers also, often with their own need for a sales contingency for their existing home, when they make an offer on a new one. A normal market accepts this fact.
— Stay tuned for the final Part 3: the Added Cost of Contingencies, when we look at the typical costs and benefits of suitable-housing and sales contingencies. What do agents need to look for in the other parties, and how should they advise their principals, in order to take the contract safely to closing?
