What is a contingent offer?

What is a contingent offerContingent offers are making a comeback as our Silicon Valley real estate market is becoming less intense of a seller’s market and inching a little more toward balanced market conditions.

What is a contingent offer? A contingent offer is a contract on residential real estate which is based on the contingency of or subject to the sale of another property.

A contingency is a way out of the contract. If   “xyz” doesn’t happen, then someone (whoever has the contingency) can get out of the obligation to complete the sale. For example, a loan or financing contingency is very common when someone buys a home. But if the loan falls through, at least under some circumstances, the buyer can back out with little or no consequence.

Most of the time, the buyers have the normal contingencies relating to financing, appraisal, property condition, title documents, and related items (approval of the CCRs, HOA docs if any, lead paint tests and more).  Sometimes the seller has a contingency (finding a replacement property, selling short and needing bank approval, or in the case of a sale after death perhaps the approval of the trustees or a right of first refusal of close relatives to purchase the house). Once in awhile, though, there is a sale subject to the sale of another house.  Often this is referred to as a “contingent sale”, even though most offers have some contingencies. We do not see these kinds of purchase agreements accepted too often in the current market in Silicon Valley.

To muddle things a bit, recently our local multiple listing service, MLSListings.com, recently eliminated the sale pending or under contract status that had been associated with either the contingency to sell another property (formerly “status 2”).  We used to have 3 types of pending sales – contingent (status 2), pending (status 3, normal contingencies in place) and sold but not yet closed (status 4, all contingencies are removed).  I don’t know why we now have just “contingent sale” and “pending sale”, but I think it was a terrible idea.

Contingent offers: they are not all the same!

A contingent offer in the San Jose or Los Gatos area may come at any stage of the home selling business:

  1. the home may not yet be on the market
  2. the house may be on the market but not yet under contract
  3. the property may be on the market and sale pending (under contract), but the buyers’ contingencies are still in place
  4. the property is on the market, in escrow (under contract) and contingencies are all removed – it is close to closing escrow

As you can imagine, there are varying degrees of risk involved with a Santa Clara County home seller accepting contracts with these various scenarios. The closer a property is to closing, of course, the more likely it is to close and the smaller the risk.  If it is not yet even on the market, the risk is far greater. (more…)