The Ifs, Ands or Buts:

Contingencies Muscle Back Into Contracts
Washington Post, November 18, 2006
By Dan Rafter

The price was solid, but otherwise the offer that real estate agent Jane Fairweather's clients received for their house last month was far from a good one.

The would-be buyers are also trying to sell their house, and they didn't want to purchase a second residence -- or carry two mortgage payments -- until they found a buyer. So the offer had a catch: Closing wouldn't take place until Feb. 14.

Making the sellers wait four months to close was bad enough. But the real deal-breaker, according to Fairweather: If the buyers didn't sell their house by Feb. 14, the offer would simply disappear, leaving her clients with a home they still needed to sell.

"Here they wanted to string my seller out for basically four months, and then there'd be no guarantee that come February there would even be a closing," said Fairweather, an agent with the Bethesda office of Coldwell Banker Residential Brokerage. "What they were telling the sellers was that they didn't want any risk in this deal. They were going to put their home on the market. If it didn't sell, they weren't going to lose anything. They wanted to shift all the risk from themselves to the sellers."

Offers to purchase homes can include all sorts of requirements for things that must happen for the deal to go through, known as contingency clauses. Many contracts make the deal contingent on, for instance, a satisfactory home inspection or the ability to obtain financing. For sellers, the most troublesome is the home-sale contingency, in which the purchase depends on the buyers in turn finding buyers for their own home.

Such clauses were rare during the real estate boom of recent years. However, as the market has slowed, they have begun to reappear.

Nothing about such a clause prevents a seller from accepting a better offer should one come along. The sellers merely have to give the first buyers the chance to sweeten their offer, perhaps by lifting the contingency, shortening it or raising the price they are willing to pay.

Even with this flexibility, many real estate agents who represent sellers consider such offers last resorts. That's because many buyers who might otherwise be interested in a home will ignore those that have outstanding contingent offers. They would rather not get into a bidding war.

Offers contingent on home sales, then, would seem a good deal for buyers and awful for sellers. But agents and sellers can work together to make contingent offers more attractive.

"Now that the market has slowed, some home buyers are finding that a home seller might accept an offer with a home-sale contingency," said Holly Worthington, managing broker and vice president of the Chevy Chase and Woodley Park offices of Long & Foster Real Estate. "But to convince a seller to take their home off the market, the buyer's agent must make a compelling case."

That compelling case is the key to home-sale contingency offers that work. For instance, Fairweather said that after her home-seller clients received that contingent offer last month, she went back to the buyers and their real estate agent to hammer out a better deal.

First, Fairweather requested that the buyers provide proof that a reputable lender would provide them with a bridge loan -- which would give the buyers cash to make a down payment on the sellers' home -- should the buyers fail to sell their house by Feb. 14. Second, the offer was amended to state that even if the buyers didn't sell their home by that date, the closing would still happen.

This gave something to everyone. The buyers would still have nearly four months to sell their current home. The sellers would be assured that they would close in February.

"If you are making a contingent offer, you need to convince the seller that you are highly motivated to sell your [current] house," Fairweather said. "We needed to see that."

Marc Fleisher, a real estate agent with the Friendship Heights office of Long & Foster, takes a similar approach. When one of Fleisher's sellers receives a contingent offer, the agent goes to work, taking a close look at the price the buyers are asking for their own home. If that price doesn't seem reasonable, Fleisher asks the buyers to lower it. If the buyers refuse? Fleisher advises his client to walk away from the offer.

"There are certain stipulations that you need to put with a contingent offer," he said. "In any home-sale contingency being considered, we put in language stating that the home must not be priced to exceed a certain level. I'll take a look at the property personally before making any recommendations to my sellers."

Fairweather, too, examines a buyer's asking price before advising her sellers to consider an offer with a home-sale contingency. A compromise might state that the sellers will consider the contingent offer for 30 days while the buyers try to sell their existing home at the original price. If the buyers do not receive an offer during those first 30 days, they then must make a specified reduction in the asking price. If in two more weeks there is still no offer, then the buyers are required to cut the price again.

Buyers who agree to such stipulations prove that they are motivated, Fairweather said.

"The seller controls his own house and the price he puts on it, how well it shows, how easy it is for agents to get in. When he accepts a contingent offer, he has now tied his life to another property where he doesn't control the price, the condition it shows in, the access to it and how easy it is for agents to show it," Fairweather said. "He doesn't control any of the marketing or the quality of the agent the buyer is working with. That's why you need to offer the seller protection when dealing with contingent offers."

Some agents still advise their sellers to avoid contingent offers if at all possible. Melinda Estridge, an agent with Long & Foster's Bethesda office, is one.

"The simple fact is, if someone buys a property with a contingency, that person is almost always less motivated to sell a home," Estridge said. "For them, if it doesn't work out they can stay where they are and re-evaluate. If they receive less money for their property than they expected, they can try to renegotiate with the seller, who is now in a more precarious situation. I always tell my sellers that if they take a contingent offer, there is only a 50/50 chance of it working out."

Estridge also coaches buyers to avoid the situation in which they must make contingent offers. She instead recommends that they put their home on the market, get it under contract and negotiate a long-term or flexible closing date, one that gives them enough time to search comfortably for their next home.

David Rainey, a real estate agent with the Mount Vernon office of Weichert Realtors, agrees that non-contingent offers are best for sellers. That doesn't mean, though, that contingent offers should automatically be dismissed.

The key to working out a good deal is to approach the sale as a business decision, not an emotional one, he said.

"The home always has emotional connotations," Rainey said. "Trying to move sellers away from these emotions is not always an easy thing to do. It can be difficult for Realtors to sometimes rein in one or the other parties to make it a purely business decision."

Buyers can go a long way toward doing this by making professional offers, Fairweather said. They and their agents should create presentations that analyze their real estate market, showing the selling prices similar homes have fetched. This way, the buyers can show the sellers at least some evidence that they have set a reasonable asking price for their home.

Making a contingent offer that will be considered seriously also means offering the right price. A contingent offer is already flawed in the minds of most sellers. Buyers who place a home-sale contingency in their offer and request a sales price far lower than asking price may risk scuttling a deal before negotiations start.

"If you are going to offer a price that is low, you need to be more careful about the kind of contingencies you are putting into the contract," said Richard DuBeshter, an agent with Long & Foster in the District.

"If you put too many contingencies in there, you need to make an attractive offer closer to asking price."

Sellers, especially when presented with a well-prepared offer, should then look hard at their own property to determine whether a contingent offer might be the best they can expect, Fairweather said. Sellers whose homes back up to major highways, sit on busy roads or are the ugliest in a neighborhood may want to strongly consider that offer, she said.

"The last six or seven years, we didn't see any contingent offers," Fairweather said.

"We'd never let a buyer even think about making one. Now buyers are not only thinking about them, they're actually doing it."