Originally posted on https://www.westbrookrei.com/7-real-estate-buying-contingencies-explained/
So, you have offers, counter offers, contingencies and contracts what do they all mean? Real estate has 12 to 15 page Purchase and Sale Agreements with a 2 page form for one thing and a 6 page form for another thing and on the back end of every transaction is usually one or more real estate agent to explain them all. Good Luck with that.
In spite of it all, Real estate sales is fraught with misconceptions and downright myths that the buying and selling public just dont understand. I am sure that a major contributing factor is all of the real estate house flipping TV shows, but the nitty gritty of negotiating a contract is pretty much lost on the average homeowner/seller and quite frankly some real estate agents.
Sure, I understand that real estate agents can help, but the inherent problem with that is that most real estate agents aren’t much better at it than the general public. The statistics bear that out. Before all of you top shelf, best of class real estate agents get offended, you only see what you want to see. You are not hiring other agents to represent you, so you have no idea how bad the representation can get. Actually I want to backtrack on that. If you were completely honest you would admit that you run into it all of the time. On the other end of your listings is a real estate agent that either gets a pass of a failing grade. You see it in their presentations, at open houses, in their offers and in their follow through. You see it every day in your offices.
Real estate used to be a craft and it could be explained by the top 5% or the bottom 95%. Today over 87% of all real estate agents wash out within 5 years. To make matters worse, over 72% of all sellers just pick the first real estate agent that they talk to. They dont start with 6 candidates and have interview marathons to narrow it down. Homeowners pick real estate agents the way that public schools assign 3rd grade teachers. You’re the rookie so you are on the front desk rotation to answer calls coming in today. The next call in is yours and so is that lead.
As far as the homeowners go hiring is perfunctory Did you pass a test? Do you have a license? You’re hired! The problem with that approach is that this is your house that you are selling. By the way why isn’t anyone asking “Is that real estate agent that you hired in their first month or their last month”? “Did you ask”?
For the past 11 years I have watched as I see real estate professionals, (investors and real estate agents alike) self professed negotiators bumble around purchase and sale agreements, offers and contingencies. It is not a problem for me, because I negotiate all of my own contracts. I know what I want to do, what options are available and whom I am dealing with.
In this blog post I want to guide sellers through the offer process so that by the time you are done you will understand the types of offers that you can receive and what you can do to alter them using simple counter offers that most buyers will not object to. I want to let sellers know that it’s ok to understand that while you own the house you have an obligation to protect your equity until you accept an offer that makes sense for you. You need to remember that you are paying a lot of their equity in the form of commissions to real estate agents for representation. If you go that route then you need to get your money’s worth.
The Most Important Parts of a Purchase and Sale Agreement
Let’s start with the different parts of a standard purchase agreement. At a minimum, residential real estate contracts typically include the following items:
Today we will focus on the last item on this list. We will examine the different types of purchase agreement contingencies that can be added to a real estate contract, and why they are so important to you as the seller. Remember, buying and selling a house are two sides of the same coin and everything that happens in a real estate agreement is NOT equally applied. Contingencies are designed to give buyers a way out of completing a sale if anything at all happens unexpectedly. Contingencies are why so many real estate sales fall apart.
Simply defined, contingencies are what the buyer wants or needs from you or someone else in order to purchase your house. Some are very simple and would be considered no brainers for most sellers, while others can tend to be quite complicated and can add substantial cost to you as the seller. At some point contingencies can become burdensome for sellers and while they are a standard part of the buyers contract, many times sellers just walk away. Only you can decide what each means for you and your family.
A warning to buyers, while there are no limits to the number of contingencies that you can place in an offer, sellers can easily get turned off if they think that you are just not that serious or too demanding. In any case, buyers that make an offer with a lot of contingencies are not given a priority and have little chance that their offer will be accepted.
Buyers make offers with contingencies for all kinds of reasons.
So understanding the types of offers you might see will require a little common sense mixed in with a little bit of math. First, I would suggest that you do your homework to prepare for what to expect when evaluating buyer offers. Second, I would suggest that you look at all offers with your eyes wide open but first. Preparation means that you read articles, talk to multiple real estate agents (hopefully the best in class) and talk to some experienced real estate investors. Ask specifically about the kinds of offers that you could see. Ask for recommendations
Understanding Contingencies and how they affect the Offer
Although these types of offers are more common than you would think, a contingency based on the sale off a house is rarely accepted in a sellers market. I have seen a few this year and I actually accepted one based on the fact that the sale of their house was scheduled to close in less than 2 weeks. There were two things that swayed my opinion.
A Home sale contingency asks the seller to accept their offer to buy the house contingent upon them selling their house first. On the surface this can sound ominous especially if their house is not yet on the market. If that is the case, you just need to ask yourself are you willing to let your house sit as well, hoping, that they sell their house fast?
In this scenario you can counter offer to either shorten the term or accept the offer providing that you can continue to market the house and offer them a right of first refusal to remove the contingency should another offer come in. Or you can just reject the offer outright.
But as in the example I mentioned above, what if the buyers house is already in escrow with a buyer for their house? You could accept, but I would first recommend that you find out several things directly from their lender before you seriously consider this type of offer.
Most buyers want move in ready and that means that they want a house that is largely free from defects. In fact 98% of all buyers order inspections. It is more than likely that your house will be subjected to at least one and as many as three home inspections and most offers are contingent on the outcome of those inspection reports. Sellers need to know that no matter how well maintained a home is, no matter when the last updates were performed, real estate inspectors “always” find something wrong. Minor or major, every house has a flaw and some are perceived based on the observations and experiences of the individual home inspector.
Even new houses that have been inspected at every step during the construction process are flawed in some way. Those flaws, however are most likely minor and never play a role in the livability of a house. Home inspectors are looking for potential problems that over time could have an impact on the health of a house or its value. Notice I said could. But inspectors are paid to call out anything they perceive to be a problem because at the point that they accept money for the inspection they become liable to the buyer if they missed something.
The following are the typical home inspections that most buyers will order. The question becomes how likely will your home pass any one or all of these inspections and will the results trigger a request for repairs or will the buyers simply walk away from the sale?
An Inspection Contingency means that the offer is valid only if the house passes inspections that have been ordered by the buyer. Sellers need to know that this contingency allows a buyer to back out of the sale if they’re not comfortable with something uncovered during the inspection process. You cannot force them to buy.
Inspections are a fact of life and sellers need to understand that once an inspection are complete, most buyers are going to ask for a series of repairs. It doesn’t matter that you are selling your house as is, as the buyers by asking for the inspection within the offer created, a contingency that they can use to back out of the purchase.
If you have done a lot of work on the house prior to listing it, the repairs are generally minor, but still repairs are costly and can run anywhere from several hundred to several thousand dollars depending on the nature of the repairs.
Sellers need to remember that inspections becomes like a material documentation of a houses condition and the reports need to be disclosed to any buyers whose offer you accept. Sellers need to know that it doesn’t matter who ordered the inspection (you in advance of the offer or a buyer while in escrow), all inspection reports become part of the houses history and must be disclosed to all potential buyers, even future buyers if the current offer falls through.
I have personally watched a buyer back out of a sale because the back sliding door was missing a screen and there was dry rot in an eaves of the rafters by the front porch. Come to find out, she grew up in a house that the roof leaked and she did not want the roof repaired, she wanted it replaced.
Not all buyers are so unreasonable, but they could back out if they found out through a report that there was old termite damage. Buyers with contingencies are a risk to all sellers.
Certainly the most common of all contingencies is financing. 97% of all “on market and conventional” real estate offers have a financing contingency. It is pretty straight forward and stipulates that the buyer will purchase your house provided that they can get a loan.
Sounds easy enough but i can assure you that over 30% of all offers contingent upon financing fall through because the lender declined to loan the buyers the necessary funds.
Lending contingencies are a standard 21 days in California. Not by law but as a common practice that most lenders strive to achieve. Remember just like buyers, not all lenders are the same and not all loans with any one lender takes the same amount of time to review and approve. What sellers need to remember is that all offers that require financing are contingent offers and no matter how much you need to sell your house every type of loan come with a certain amount of risk to the seller that the buyer may be declined. It is up to you to get ahead of that train and secure your ability to talk directly to the lender in advance of accepting an offer. You can do that.
In my experience the big bank, Chase, Bank of America and Wells Fargo are the slowest to respond and to close. They lumber along at a snail’s pace by design. The people that work for them dont care if one loan or another gets through the process because that is not how they are paid. Your concerns to a giant about a 45 day close are like arguing your water bill to the city. It falls on deaf ears. I no longer accept an offer where a large bank is the lender.
Independent mortgage companies that specialize in Home Mortgages are generally the fastest to respond and the best to meet under 30 day timeframes. They are eager to serve their clients because this is their primary business. But even with these lenders, sellers need to remember that until it is sold, it is still your house and you are in control of how you will sell your house. It doesn’t matter that the lender wants 45 days to close unless you accept it. I have told many buyers that unless their lenders can close within 30 days I won’t accept the offer.
As the seller you can reject an offer from a potential home buyer because you refuse to work with their lender for practically any reason you want. Did you know that you can talk directly to that lender and tell the buyer you will only consider accepting their offer if they give their lender permission to you directly regarding the loan and about the buyers qualifications.
Most real estate agents will not appreciate you wanting to talk to the lender directly. By the same token they do not typically do that either. Most just looked shocked when I tell them that I want to talk to the lender to verify how qualified the buyers are. You need to remember that you are selling a house and there is no reason to take your house off of the market because someone wants a chance at buying it without pre qualifying them. This is NOT the Lottery! It doesn’t matter if your agent doesn’t like like getting in the business of the buyer with their lender.
Most agents like to keep everything at arm’s length. They like subjugating the sellers to the back seat. Some do it to not risk spoiling the sale. I never want an agent that represents me to talk to lenders for me because I want to hear from the lender directly how likely the transaction is going to make it to closing. I do not want a watered down version regarding time frames that they might find acceptable I want to ask direct questions like
If any of the answers is contrary to your timeframes you can just reject the offer outright or counteroffer stating that you would like the buyer to find another lender.
Understanding the Different Financing Types
Accepting any offer, unless it’s all cash with NO inspections, NO financing, NO appraisals and NO Contingencies has a risk of falling apart. It is important that the seller understands all of the types of offers that include financing contingencies so that they can make an informed decision. It is important that the seller understands that every offer with government backed financing is a more volatile and risky type of loan, and there is a 33% chance that the loan may never materialize. Sellers wanting a less risk with financing can demand that buyers use conventional loans which typically require up to a 20% downpayment and are a lot less volatile.
Other Financing Contingencies
Generally the appraisal is the last hurdle in the financing loop that requires third party scheduling. Appraisers like home inspectors need to come out and view the property, take measurements, look at the condition of the house, verify its location, age and square footage. They also often perform mini inspections at the lenders bequest validating that all mechanical systems are operational, that all windows have their screens and that all of the safety features required by today’s building codes are present. (Smoke and Carbon monoxide detectors are in place. Hot water heaters are strapped and that garage doors are operational if blocked or when there is a power outage..
Like many parts of the escrow period this is another time consuming step that can become very frustrating very fast. Although appraisals are pretty straight forward there are many times that the appraiser cant find the comparable sales in the neighborhood to value the house at the sale amount. When that happens the sellers have a choice: 1) renegotiate the sales price with the buyer, 20 Demand that the buyer come up with the difference in cash or 3) start the sales cycle all over with a new buyer.
In any case if it is an appraisal that was performed by a VA or FHA appraiser, that appraisal amount is directly tied to the house and the value becomes public record if new buyers are found and want an FHA loan. I have been involved in many sales whereby the sale hinged on an appraisal that came in under value. Another option is to protest the appraisal and ask that it be performed again by another independent appraiser. It is rare that another appraiser will contradict a previous appraisal unless there was another sale of a comparable house was missed.
All in all, appraisals are pretty straight forward and technically they can be explained like so many other processes and procedures in real estate, but each appraisal is different and has a different purpose. For this article know that your appraisal is a hurdle and until it comes in at value, the lender will not approve the loan.
Understanding Appraisal Types
Many things have changed over the past several years and last
This is probably the easiest of all contingencies to explain and yet it is another reason that many houses fall out of Escrow.
n real estate, the title to a home is the record of its ownership. It’s a legal document that shows who has owned the home, past and present. It’s also a record of any liens or judgments that have been made against the property. In a typical scenario, a title company or your attorney will review the title on your new home before closing and resolve any issues so that the title can be transferred to you free and clear.
However, there are a few occasions where problems with the title report cannot be solved before closing. That’s where the title contingency comes in. It gives you the option to leave the sale rather than having to deal with the possibility of contested ownership or having to pay off someone else’s debts.
Overloaded Yet? If so it is ok. Let these things sink in. Understand each of the contingencies purposes. What is the buyer trying to accomplish and start to build a plan around each offer With everything that you just learned, it is pretty obvious that Buyers and their agents can make offers that ask sellers for a lot of concessions. It is very common and the next step in the process is figuring out what to do with the offers so that they make sense to you. Some people build spreadsheets (for receiving multiple real estate offers), others have a grading system and yet others just look at each offer and figure out what works about each one and what doesn’t. Sure it is great to have options, but unless you have an idea of what you want, it makes it very difficult to take the next step.
Go back and dust off your original plan and Decide on the criteria that you think is most important.
Ask yourself what’s most important to you. For example, do you want to sell quickly and get a fast closing date? Or, maybe you want to get the most out of the house in terms of sales price And while both of those might be important to you, one of them will be more important, so determine which is most important for you.
Second, think about your bottom-line price.
In a seller’s market, you may get a higher price than your bottom-line price but it’s also very common for property owners to accidentally over-estimate the price they think they’ll get on their house. Therefore, determine your bottom-line price. Chances are, you’ll get an offer somewhere between your bottom-line price and your optimum price.
Third, think about the Closing date you want and consider any flexibility you have.
You might want to move right away, for example, but you could potentially open yourself up to better offers if you don’t press for a specific closing date but instead find out what buyers are willing to offer.
Fourth, remember that you’re still the seller.
Even though it’s a seller’s market, remember that the buyer is still the one with the money and they could decide to buy a different house. Decide which terms and conditions are absolutely imperative for you and which ones you’re more flexible on. That way, if a buyer has the cash. with no contingencies and is willing to close within your preferred timeline, you can work with any conditions they may have directly with them.
What Makes Sense?
In a seller’s market, it’s a given that the seller has the advantage and that usually shows up in price but that advantage is not a guarantee. They are statements about all things being equal and what should happen. What you cant forget is the most important variable Your House and it still needs to compete. Is it ready to do that? How is it’s price, its age, its location and condition? Only you can say for sure what you want. Remember though, only the buyers can tell you what it’s worth, because any houses value is only what someone else is willing to pay for it.
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