Despite negative reports on the state of Home Sales in many parts of California, the truth is that the market is active and properties are selling, very often with multiple offers. While there are cash buyers taking advantage of distressed home sales (ie. short sales, bank owned properties and foreclosed-on-court steps sales) the majority of buyers are needing to get a loan.
When writing an offer on a property, the standard California Department of Real Estate deposit receipt, allows both the buyer and seller time to obtain reports, review reports and to respond to reports. This period of time is called the Contingency Period for Physical Inspection and the standard number of days is seventeen although this can be shortened by both parties. There is also a Contingency Period for obtaining loan approval. With increasingly tighter standards being applied to the loan process, and appraisals sometimes needing to be reviewed, this period of time can very often take up to thirty days and it is probably prudent to leave this loan contingency in place until funding is completed.
There are buyers in this market who would like to take advantage of lower interest rates to either move up to a larger property, downsize to a smaller property and smaller mortgage, or who want to move out of the area to a less expensive area. To accomplish a simultaneous exchange of one property into another will most often mean that the home owner must purchase his or her next home CONTINGENT on the sale of the present property.
So the question is, if you are a seller, is it a good idea to accept an offer with contingencies? The standard time of seventeen days for Contingency for Physical Inspections can be shortened considerably if the seller has prepared the home for market by procuring in advance, a pest control inspection, property inspection, well and septic inspection if applicable, a roof inspection if the roof is older, a fireplace inspection and any other reports a buyer might deem necessary. If the home has had a slide, drainage issues or is on a hill, a geologic or foundation inspection might be in order. In addition, the seller will have filled out responses to a number of questions on Sellers Disclosure packet giving the seller an opportunity to talk about improvements/repairs made to the property over the years.
The purpose of these reports is to provide the buyer with assurances that the property is being sold with full disclosure and understanding of the condition of the property and that the price agreed reflects the condition of the home. At the same time, these reports help shift any future liability from the seller to the inspectors and thus, they are a very good thing for the seller to provide when selling a home.
Should the buyer pay and obtain these report if they are not already provided? The answer is a resounding YES! The buyer needs to have full information and understanding about what he or she is purchasing. The home inspection report in particular is instructive insofar as most inspectors will take the time to go over any issues in detail with the prospective home owner, pointing out things that need correction now and what might need to be watched down the road.
While many agents representing the seller will want to have the buyer and the buyer”s agent remove “Loan Contingency” within a set number of days, it is wise to keep the loan contingency in place for as long as possible. Occasionally something can come up at the last moment to cause a hiccup and neither the buyer nor his agent wants to put into jeopardy the earnest money which can be as much as 3% of the purchase price. It is important to buyers to remember that there will be one final check on the credit report prior to the lender funding the loan and so it is imperative that the borrower not go out and purchase that new washer/dryer or refrigerator with a credit card BEFORE the escrow has closed.
The most unattractive contingency from a seller”s point of view, is the addendum that states that the purchase of the home is CONTINGENT ON SALE OF BUYER”S PROPERTY. Personally, I discourage my sellers from accepting a contract with this contingency in it. While it is possible to write into a counter offer that the agent for the seller has the right to have a copy of the sales contract on the other property, (if it is in escrow) has some say in the pricing of the property (if it is not yet on MLS) and can ask for the right to speak to the lender of the buyer (if other property is in escrow), the seller has given up a lot of control. In accepting an offer contingent on the sale of another property, the listing must be changed on the Multiple Listing Service from ACTIVE to PENDING WITH RELEASE. The home will no longer appear on websites as active and so will be off the search radar for potential buyers.
If a buyer has located a home they really want to purchase and the owner will not take a contingency sale thereby removing the property from the market, then I would encourage that buyer to aggressively price the property to sell quickly so they can make that other purchase a reality.
My feeling about sellers who need to sell first in order to buy is that they put their homes up for sale and add into their listing remarks, that the sale is SUBJECT TO SELLER FINDING REPLACEMENT PROPERTY. This might slow down some showing activity but it will protect the seller from having to sell the home if they have not, in the interim, located other viable properties that could work. Interestingly enough, over the thirty plus years I have been selling real estate, I find that miraculously, the perfect home appear for the sellers once they have found a buyer for their home. It is one of those synchronistic wonders of the world!
For further insight into Contingent Clauses, please give me a call!