Contingent Offers

As discussed on Offers 101, all offers contain contingencies: conditions that must be satisfied in order for the sale to complete. For example, the Typical contingencies of an offer are financing and physical condition – a buyer will purchase a property contingent on the buyer obtaining financing and approving of the property’s physical condition. Once the contingency is met, the buyer finalizes his loan and completes his physical inspections, the contingency is then removed and the sale moves forward.

However, what if a couple has a property that they need to sell in order to purchase their home? It might seem that they’d have to sell their property and hope that the perfect home suddenly becomes available the day they close escrow. Fortunately, this isn’t the only option – your agent can write what is often called a “contingent” offer – an offer to purchase a home that is contingent upon your current home selling. It allows you to make an offer on your property of choice while your current property is still for sale. Since the offer is contingent upon your home selling, if your home doesn’t sell you aren’t obligated to purchase your replacement property and are entitled to the full amount of your earnest money deposit.

The Nitty Gritty

“Contingency Period” and Contingency Removal: As you might expect, there are certain restrictions with writing this type of offer. In most situations, the sellers of the home you are purchasing will have a mechanism by which they may accept another offer if your home takes too long to sell. While virtually anything in a Real Estate transaction may be negotiated, a seller will usually give a “contingent” buyer 17 days to sell their property – this is commonly known as the “contingency period”.

If this period expires and the buyer’s property hasn’t sold, the seller will then have to right to invoke a “notice to perform”; a notice to the buyer to either:
A) Remove the contingency of sale and agree to purchase the property whether their home sells or not.
B) Cancel the purchase contract.

If you, the buyer, cannot financially purchase the property without the proceeds from your current sale, then in all circumstances we highly recommend canceling the purchase – you’ll be fully entitled to your deposits and you can always write an offer on the property again once your property gets an offer of its own.

Replacement property Contingencies:

Just as a buyer may make an offer subject to the sale of their home, likewise, a seller may offer their home for sale subject to the purchase of their replacement property. This type of contingency is basically the mirror image of a buyer’s contingent offer: The seller agrees to sell their home to a certain buyer on the condition that they purchase a replacement property of their choice. Like a buyer’s contingent offer, the seller will usually have a certain number of days in which to find a replacement property. Should that time period expire and no replacement property is found the seller will then have the

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option to:

A) Remove the contingency of finding a replacement property and continue with the sale
B) Cancel the purchase agreement and return any deposits to the buyer

Multiple contingencies

By now you may be thinking: “what if I have to sell a home, my buyer has to sell a home, and the seller demands that they find a replacement property.” Yes, this is a sticky situation. While scenarios like this have certainly been successful, they’re rare and difficult, to say the least. Yet another reason to consult an experienced Realtor in your Real Estate transactions, and we at the Ramirez Office would be happy to help.

Lease options

While contingent offers certainly are one creative option to purchasing a home, lease options are another great opportunity for both buyers and sellers in a more “normal” market with listing periods of two to three months on average.

As its name suggests, a lease-option is a “lease” with an “option” to purchase. In this situation, generally speaking, the buyer will make an offer at a certain price will then technically become a tenant for a certain period (usually 6 to 12 months).

At the end of their lease period, the buyer will then have the option to purchase the property at the previously agreed upon price and terms.

This “option”, however, isn’t a carte blanch option in the informal sense to just purchase the property or move on. In most situations, the buyer will be obligated to provide option money or an option deposit, usually around 3% of the purchase price. Should the buyer decide to not exercise the option, the seller will then be entitled to the option money.

Advantages vs. contingent offers

In a particularly depressed market, lease-options are means for bona-fide buyers to secure their homes where a traditional purchase agreement wouldn’t be possible. For instance, a buyer may be two months away from the expiration of a hefty pre-payment penalty but has found the perfect home. Rather than suffer the penalty, the buyer can now enter into a six month lease option, during which time they may move into their new home, prepare their home for sale, list and sell their home once the penalty period expires, and then become owner of their replacement property. In addition, option periods aren’t fixed: if you enter into a six-month lease option, so long as it’s agreed upon earlier, you may exercise your option and purchase the home at an earlier date. Therefore, a buyer may enter into a six month option but exercise that option as soon as their home sells.

In this sense, it’s almost like an extended contingent offer: they enter into the lease-option and then have six months versus 17 days to sell their home.

Lease options and contingent offers can be among the most complex of residential transactions; be sure to contact your experienced agent or the Ramirez Office for assistance.