Contingent sale offers can benefit sellers
How release clauses, backup offers work
By Dian Hymer, Monday, January 19, 2009.Convincing a seller to accept an offer that's contingent on the sale of another property can be challenging. The odds of acceptance improve if the offer is structured to the mutual benefit of both buyers and sellers.
From the buyers' perspective, there are advantages and disadvantages to contingent sale offers. A big advantage is that the buyers don't have to go through with the purchase if their home doesn't sell. They don't risk much.
The buyers may incur costs of inspecting and appraising the property, but the expense is minimal compared to buying a new home before selling the old one and ending up owning two homes at once.
From the sellers' point of view, contingent sale offers are not desirable because the outcome is uncertain. This is why sellers who agree to a contingent sale offer usually want a release clause in the contract.
A release clause allows sellers to continue to market their home and accept other offers in backup position, subject to the collapse of the primary offer. If the first buyers can't perform, they have to withdraw from the contract so that the seller can proceed with backup offer.
Buyers can spend a lot of time finding the right house to buy. If they can't sell their current home before another buyer boots them out of contract, they have to start house hunting again.
HOUSE HUNTING TIP: A contingent sale offer can be structured to give buyers more certainty about being able to close the deal. Normally, when there is a release in a contingent sale offer, it goes into effect as soon as the contract is ratified. But it doesn't necessarily have to go into effect then.
Buyers can request that the release clause not go into effect for a period of time, say 14 to 21 or so days. If the buyers' home is ready to be put on the market and it's priced right and well located, there's a chance it will be under contract before the release clause goes into effect.
A release clause that doesn't go into effect immediately should specify that if the buyers' property is under contract within the specified time frame, the release clause will not go into effect unless that deal were to fall apart.
Sellers might think this approach benefits only the buyers. However, it can benefit the sellers in terms of their overall marketing strategy.
When sellers of a property that's listed on the Multiple Listing Service (MLS) accept a contingent sale offer with a release clause, this information is published in the MLS. It is a material fact affecting the sale. A buyer can make an offer only for a backup position. Many buyers don't want to waste their time.
So, a release clause can slow down the marketing of the sellers' property. And, it can be difficult to regenerate enthusiasm about the property if the buyers' property doesn't sell and the sellers' listing is still encumbered by a release clause.
The sellers' property will show up as pending in the MLS if the buyers and sellers agree to delay the activation of the release clause. If the buyers' property doesn't sell by the end of the specified time period, the sellers' property will show up in the MLS as back on the market. This quickly and clearly announces that the listing is available for sale with no strings attached.
THE CLOSING: Make sure your agent includes in the confidential MLS remarks to agents that the listing is back on the market because the buyers' home didn't sell, and due to no fault of the listing.
Dian Hymer is a nationally syndicated real estate columnist and author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.
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Submitted by Jerry Hoffman on January 19, 2009 - 4:18pm.
Dian,
The biggest obstacle to home sale contingent offers, is more agents than sellers. It may be semantics to some, but an offer that initiates a kickout clause on a home sale contingency, is different than a a "back up" offer waiting for a contract to fail to close. When a kickout notice is initiated, within an agreed upon time period, the first contract drops the contingency and goes to closing or drops the contract. Procedures vary around the country, but I would expect that to be the case with any kickout provision. Backup offers are get in line and wait for a previous deal to fail. How the MLS handles it is another matter. Back in the days when we had two MLS systems in this area, one could search only home sale contingent listings along with all the other active (non-contingent) listings. The larger MLS couldn't and agents were just unwilling to do two searches. Therefore there was zero activity and agents would recommend against taking the contingency. That search deficiency is no longer the case, but agents still don't search that way and feel they don't want to wait for an answer.
I had the occassion to speak with an agent in Lousiana (I'm in Illinois). Their contingency specifically states that notice is given to the first buyer when a seller receives an offer that is "acceptable" to seller. This agent stated there was an "ethical" duty to the buyer, to give notice when the offer was received. This is before the seller has a chance to negotiate the 2nd offer to a point of being "acceptable", as opposed to "accepted". The agent was initiating a kickout based on receiving a contract that may never become acceptable.
In most areas (not all), if a buyer has a house to sell it should be on the market. Asking a seller (who has been on the market) to give the buyer time before they consider another offer, is something I would have a hard time recommending. Procedural differences aside, I believe agents are the problem, not the sellers.
Think how many people are not writing contracts because of the perception, the home sale contingency is a bad idea. What if these buyers actually started having their contracts accepted and the public sees property starting to sell?
Maybe those on the fence will realize we hit bottom and its time for people to get back in the market.
Just a thought.
Submitted by John Rakoci on January 19, 2009 - 7:37pm.
The two MLS I belong to give the option to search all listings or only those 'active' without contingencies. With the amount of inventory available few will consider showing a 'pending' listing. Most agents have not been working long enough to remember 'pending' meaning anything but waiting on a lender to send a check to a lawyer. A pending contract effectively removes a listing from consideration unless it is one of a very few in a client preferred building or development.
Submitted by David Sherfey on January 20, 2009 - 7:05am.
Maybe if the buyer's house is in an area where properties are jumping off the market quickly, but where is that happening?
House sale contingency means that the buyer is in the weak position. The weaker their position is, the more motivated they will be to get their house under sale contract quickly. Whatever local MLS mechanism and contract structure is required for the seller to also keep their house on the market fully-available continuously should be employed.
Taking a house off of the market is not a good marketing strategy(!). Yes it is a buyer's market now, but in this discussion we actually have two sellers in the chain, with a weak buyer in the middle.
Dian contradicts herself toward the end;
"...it can benefit the sellers in terms of their overall marketing strategy." Followed by an explanation why; "a release clause can slow down the marketing of the sellers' property..." Perhaps there was something missing in the article?
David Sherfey - Associate Broker
http://ResidentialPropertyMarketing.com