Pros and Cons of Submitting a Contingent Offer
Pros and Cons of Offers with Contingencies are something every buyer should understand before shopping for a home. Buying a home in Grand Junction or anywhere in Mesa County is a monumental step in life. Crafting the right offer can mean the difference between sealing the deal or losing out. One tactic that buyers often consider is writing an offer contingent on the sale of their current home. This type of contingent offer to purchase a home includes specific conditions regarding the sale, and ultimately the closing, of your existing home.
Let’s take a closer look at the intricacies of contingencies. What they really mean, how they can help protect you as a buyer, how they are perceived by a seller, and the strategies to make your offer stand out in a competitive market.
Keep in mind that as a buyer, this type of offer will work best if the home you like has been on the market for a while with no other offers, versus a new listing, or one with multiple competing offers.
Be sure to read through to the end where I have some bonus tips!
What is a Contingent Offer?
Home Sale Contingency: This is when a buyer must sell (close) their current home before purchasing the new one. This type of contingency is less common in a seller’s market or price points where competition among buyers is strong regardless of the overall market conditions.
Submitting a contingent offer means that the buyer is only obligated to proceed with the purchase if certain conditions (contingencies) are satisfied. These conditions typically protect the buyer and ensure that they can back out of the deal without penalty if their circumstances change or the conditions aren’t met. The majority of home purchases have some type of contingency (think inspection) attached to them, including cash offers. But not all contingencies in real estate are viewed the same.
Common Contingencies Include:
Financing Contingency: The offer is contingent on the buyer securing a mortgage loan.
Inspection Contingency: The home must pass a professional home inspection and/or testing for things like Radon, mold etc.
Appraisal Contingency: The property must appraise for at least the agreed upon purchase price.
Successful Home Closing Contingency: As a buyer, the home you are selling already has an offer on it and you are waiting for it to successfully close.
Pros of Writing Offers with Contingencies
Protects the buyer’s interests
- The primary advantage of including contingencies is that it provides a safety net for the buyer. If unforeseen issues arise, such as difficulty in obtaining financing or problems uncovered during a home inspection, the buyer can withdraw without losing their earnest money deposit. This protection ensures that buyers aren’t forced into a deal that could jeopardize their financial stability.
Allows time for necessary steps
- A contingent offer gives buyers time to resolve critical issues. For example, selling their current home or securing a mortgage. If a buyer’s funds are tied up in their existing property, a home sale contingency allows them to align the timing of the sale and purchase without financial strain.
Certain contingencies can provide leverage in negotiations
- If the inspection reveals minor issues, the buyer can request repairs or a reduction in price or threaten to walk away. Sellers may be willing to make concessions to keep the deal alive, especially in a buyer’s market, or at higher price points where demand is lower.
Minimizes financial risk
- Without contingencies, buyers might be legally obligated to complete the purchase, even if circumstances change. For instance, if a buyer fails to secure financing and lacks a financing contingency, they could forfeit their earnest money or face legal action.
Contingencies significantly reduce risk
- First-time buyers often rely on contingencies to navigate the complex home-buying process. With contingencies in place, they can proceed with confidence, knowing they have room to address unforeseen challenges without severe consequences.
Cons of Writing Contingencies in Offers
Reduces Appeal to Sellers
- From the seller’s perspective, contingencies add uncertainty to the transaction. Any type of contingency signals that the deal may fall through if the conditions aren’t met. That makes it less attractive than a non-contingent or cash offer. In competitive markets, where multiple offers are common, sellers are likely to favor offers with fewer strings (contingencies) attached. I’ve got plenty of stories I can share about this!
Risk of Losing the Property
- In hot real estate markets, contingent offers often lose out to stronger, more straightforward offers. If a seller receives multiple bids, they may bypass a contingent offer in favor of one with fewer potential roadblocks, even if the contingent offer is higher in price.
Time Sensitivity and Deadlines
- Contingencies often come with strict deadlines. For instance, a financing contingency might require the buyer to secure a loan within 30 days. Or, a home sale contingency might have a specific timeline for selling the buyer’s existing property. Failing to meet these deadlines can void the offer or lead to penalties.
Weaker Negotiating Position
- Buyers with numerous or out-of-the-ordinary contingencies may have less leverage when negotiating terms such as price, closing costs, closing dates, or repairs. Sellers might be less willing to accommodate requests if they perceive the deal as uncertain or overly complicated.
Potential for Double Costs
- A home sale contingency can leave buyers in limbo. Particularly if they move forward without selling after their contingency gets called. In such cases, buyers may face overlapping costs, such as paying for two mortgages, insurance, and property taxes, until their existing property sells.
Tips for Writing a Strong Contingent Offer
Please note there is a big difference between an offer including common contingencies (think inspection, financing, appraisal) and an offer contingent on the sale of a home. If you decide to write a contingent offer, consider these strategies to make it more appealing to sellers:
Limit the Number of Contingencies
- Include only the contingencies you truly need or that your agent communicates are common with most offers. A simpler offer is often more attractive to sellers.
Set Realistic and Short Timelines
- Tight deadlines for resolving contingencies can reassure sellers that you’re committed to closing the deal quickly.
Provide Evidence of Financial Stability
- Offer a larger earnest money deposit or include a pre-approval letter from a lender to demonstrate your seriousness and financial readiness.
- A higher offer price can offset the perceived risk of a contingent offer, making it more enticing for sellers.
Negotiate the Kick-Out Clause
- A kick-out clause allows the seller to continue marketing their home while your contingencies are resolved. If another buyer makes an offer, you’ll have a set period to remove your contingencies or step aside and withdraw/cancel your offer.
If this sounds like a lot, don’t worry. I have been successfully negotiating home sales for sellers and buyers since 2001. Let me put my years of knowledge to work for you!
Common Buyer Misconceptions of a Home Sale Contingent Offer
You think you are submitting a strong offer, but you’re not.
A home sale contingency offer is the least desirable of all offers to a home seller. A seller accepting this type of offer is doing so in hopes that your home actually sells. Once a home seller accepts this type of offer, the showings generally slow considerably as they are basically taking their home off the market waiting for your home to sell. Because of the unknown, sellers demand a premium from the buyer.
You think you are actually securing the purchase of the home.
You may have an accepted offer if the seller agrees to this type of contingency. However, you have no type of guarantee that the home you just fell in love with will actually be the one you buy. With an accepted offer of this type, sellers continue to market their home for sale. If another non-contingent buyer submits an offer on the home you may only have “x” amount of time. You’ll need to prove that the home you are selling has an accepted offer on it or that you qualify to purchase the new home without selling first.
Generally speaking, most sellers require a “kick-out-clause” where the seller will only give you a few days after they call your contingency. If you do not have an accepted offer on your home within that kick-out-clause timeframe the sellers can move on to the other offer and you’re back to square one. However, now you have your home on the market. You don’t know where you will move to. Additionally, with a kick-out-clause, sellers can call your contingency at any time, whether they have received another offer or not. They get tired of waiting.
You think you have the upper hand in negotiating.
You could have an 850-credit score and a 50% down payment, but most sellers still want list price or higher to even consider this type of offer. They weigh the risks and require additional incentives for accepting your offer. Even if your offer was accepted by the seller, many homebuyers become afraid of losing their dream home and end up selling their current home, in a panic, for less than they could have. You might overpay by $10,000 or more on the purchase and sell for $10,000 less than you could have. Is a potential $20,000 swing worth the convenience? It adds up quickly.
Why Do Sellers Require a Premium When Accepting Home Sale Contingent Offers?
- They have no idea if your home is priced correctly.
- They have no idea how motivated you are to actually sell your home.
- They have no say in the qualifications of the agent you hire to sell your home.
- They would be accepting double the normal amount of contingencies to get their home sold. If an average buyer generally submits an offer on a home with an inspection, appraisal and financing contingency, adding one more home sale to the mix essentially doubles the hurdles needed to successfully close.
Alternatives to Writing a Home Sale Contingent Offer
If you’re wary of writing a contingent home sale offer, consider these alternatives:
- Bridge Loan: A short-term loan that allows you to buy a new home before selling your current one.
- HELOC (Home Equity Line of Credit): Use the equity in your current home to fund the down payment or outright purchase of your new home.
- Secure an offer on your home, then write the offer on your next purchase before your current home closes. Obviously temporary housing may be needed if you have ultra specific requirements for your next home and nothing comes on the market before you close your home sale or you are unable to time the closing dates.
The New Contingent Home Sale Offer
Ever since I started my career in real estate, offers to purchase a home contingent on the successful sale of a buyer’s home have not been a common occurrence. Years ago they were. Prior to the housing bubble it seemed like everyone could easily secure a bridge loan or qualify to purchase their next home without selling first. If you weren’t willing to take on that type of risk (buying before selling), contingent offers were more common.
Times have changed. Lending requirements have tightened, and many people just aren’t willing to take on the risk of double payments even if they qualify to do so. So, what are people doing to navigate the home sale then purchase process?
I recommend people start by getting their home ready to put on the market. Bring on the home stagers, pre-inspections, painters, and plenty of moving boxes for de-cluttering and pre-packing. When the home is ready for the market, we immediately start shopping! Once we find a few homes that pique your interest, we immediately put your home on the market. When an offer is secured on your home, we turn around and write an offer on the home of your choice that is contingent on the successful closing of the home you are selling. This is different than writing an offer contingent on the sale of a home. Your home already has an accepted offer on it and is simply waiting to close.
Bottom line
Writing a home sale contingent offer on a home can be both a safety net and a potential hurdle. While it protects buyers from financial risks and unforeseen issues, it can also reduce the offer’s attractiveness to sellers, especially in competitive markets. By understanding the pros and cons of offers with contingencies and tailoring your offer to the circumstances, you can strike a balance between safeguarding your interests and appealing to the seller.
Ultimately, whether or not to write a home sale contingent offer depends on your financial situation, the market conditions, and the specific property you’re pursuing. With careful planning and the right strategy, you can navigate the home-buying process with confidence and success. Just know that home sale contingency offers can be very emotional for people.
If you feel like a contingent offer is the only way you’ll ever get into your next home, please contact me to dicuss the right way to submit a contingent offer that gets a seller’s attention! Simply submitting a list price contingent offer, then promising to list your home within a week is no longer enough to get you into the home of your dreams.
It can work well, under the right circumstances
Every year thousands of homes sell with home sale contingent offers. It is important to understand the situation when this type of offer has the highest likelihood of getting accepted. In fact, I usually call sellers before writing the offer to see if they would even consider this type of offer. Not every seller will. Every seller’s motivation is different, but their market time and conditions in the area you are buying and selling give a lot of weight to a seller deciding to accept this type of offer. Expecting sellers of a new listing on the market to consider this type of offer without weeks of market time exposure will let you down more times than not. While home sale contingent offers aren’t often a seller’s first choice, they can work perfectly under the right circumstances.
Give me a call to discuss your unique situation to find out how best to move forward in securing your next home!
Read my post called Buyer Strategy for buying a home in Grand Junction for more tips or Buying a Home in Grand Junction that highlights the importance of hiring the BEST real estate agent to represent you.
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PAUL ASPELIN, REALTOR®
GRI, SRES®, CNE
Serving Grand Junction, Palisade, Fruita and all of Mesa County
Text or Call (612) 306-9558 (locally based)
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