Contingent 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:
- the home may not yet be on the market
- the house may be on the market but not yet under contract
- the property may be on the market and sale pending (under contract), but the buyers’ contingencies are still in place
- 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.
Risk and documentation with contingent offers
When considering a contingent offer, home sellers and their agents may want to see a lot of documentation. The closer it is to closing, the less risky the contingency and most likely the less paperwork the sellers and agent will want or need to see. For instance, if the sale is 2 days away from close of escrow, all that may be needed is a copy of the purchase agreement (contract) and the contingency removals. But if a house isn’t even on the market yet, so much more will be required to convince the seller that it’s a good idea to take the contingent offer: a market analysis (CMA) of the home to be sold, the signed listing agreement, perhaps also a copy of the comps (comparable sales) and maybe even a marketing plan for the property. The sellers or their agent may want to even see the condo, townhouse or house in question first.
Protection time and kick out clause
If a South Bay seller is willing to take an offer contingent on another home selling, there will be defined time limits for that sale to happen. Most of the time, the buyer is given anywhere from 2 to 4 weeks, possibly longer, to get the home under contract. During this time (which the buyers and sellers agree to upfront and in writing), the buyer is protected so it’s often referred to as a protection time frame. After that, the seller may tolerate waiting but may have the right to “kick out” the buyer should a better, non-contingent offer come along. That’s called a kick-out clause.
In some cases, buyers request no kick out time, but ask for the contingency to be extended through the escrow. For the right price, home sellers may accept that term in the contract.
Interested in a home which is sale pending with a contingent offer?
If you like a home which is sale pending or “in escrow” but subject to the contingency for the sale of another home selling, you’ll want to ask a few questions. Here are some to include:
- What is the status of the home sale for which there is a contingency? Is it on the market or not, is it under contract or not, are there contingencies in place or not?
- You’ll especially want to know if that home is sold ALSO contingent on another sale. Sometimes there are multiple “contingent sales” stacked up like dominoes. As you might imagine, if one falls through, they might all fall through. I’ve known it to happen!
- Does the seller have a kick out or release clause?
- If so, when is it in effect? (How long is the buyer protected?)
- Is the seller accepting back up offers? Or only accepting offers if the protection time frame is over?
- Is the sale of the house subject to the sellers’ approval or not?
Contingent offers and sales can be tricky! There are many nuances (and sometimes many loopholes too). I’ve seen buyers accept terms that included things such as the sale of their home to be approved by the seller or not. This is understandable, to a degree, as the seller may not want that buyer to also accept a contingent offer! But it can be abused and the seller may, in bad faith, refuse to proceed with the sale because of the temptation of a better offer. So lots of subtleties involved. Before writing, or accepting, a contingent offer, please be thorough in your investigation of the ramifications of the deal. You don’t want to get trapped or feel tricked in the process of selling or buying your home.
Finally, in our low inventory market, some home sellers who are afraid of selling but not being able to buy are placing contingent offers on properties which are not selling at quite so frantic a pace. I’ve had some nice success with contingent offers in the last 12 months and suggest that when well handled, they can be a really great win-win for all.
For further reading on contingencies and contingent offers: