"Sale of Home Contingencies" Cost the Buyer Serious Money

One of my clients recently asked me what the practical implications of a sale of home contingency would be on his ability to buy a home. It's an important question buyers need to consider when they already own a home and need to sell it before they can buy their next home.

Let me approach this from the seller's point of view and we'll work back to what it means practically to a buyer.

As a rule, sellers are looking for three things when they sell their homes: 1. Sell their home for the most money 2. In the shortest period of time 3. With the fewest possible problems.

When you bring a "sale of home contingency" you will be directly working against two of the seller's primary concerns. That's because a sale of home contingency is a problem and it will delay the sale of the house while the seller waits for you to sell your house.

It's a problem for the seller because as soon as they accept a sale of home contingency the seller has lost all control of the sale of their home. They have to rely on YOU, the buyer, being a serious seller. If you are not serious and don't price your home well or make it difficult to show or keep your home in poor condition it will take longer for your house to sell; the longer your home takes to sell the longer the seller's home takes as well.

Also, if your home does not sell (which is always possible) the seller has lost the ability to sell his house to another potential buyer while he waited for your home to sell. When the seller's home comes back on the market it will be at least a month later. And, as everyone knows, the longer a home takes to sell the lower the ultimate sales price.

So, from a seller's point of view, when they get an offer with a sale of home contingency they won't want to accept it for the reasons outlined above. The end result is that accepting a sale of home contingency is a big risk for a seller.

In order to convince a seller to accept a big risk you will have to compensate them for the risk; that means you need to pay a price for that risk. The seller is usually looking for a 2-5% increase in sales price for a sale of home contingency -- and that's only if they will consider it at all.

Generally, a seller will not even consider a sale of home contingency until their home has been languishing on the market for beyond the average length of time. So, when you find a home that's been languishing and has not had a price change you have the highest odds your offer with a sale of home contingency will be considered.

Even if your offer is accepted the seller generally has the option to "kick out" your offer. That means that if the seller receives another offer while he is under contract with your offer he can force your offer out and accept the other offer. In reality, this rarely happens because most buyers don't want to look at homes that are not fully available to buy, but, this does happen occasionally.

If your offer to purchase is kicked out after you've put your home on the market you'll be in a very difficult position. That's because you'll already be on the market and then have nowhere to move since "your" next home is no longer yours. If you then remove your current residence from the market you will make it much more difficult to sell your current home the next time it goes on the market.

Another concern is that the buyer of your home will be in a better position to negotiate a lower price on your sale. That's because you will be anxious to remove the sale of home contingency in order to guarantee you get the home you want. Thus, you will be far more likely to be flexible on your negotiations on your current home when you have a sale of home contingency.

When you have a sale of home contingency you will pay a higher price on your next home and get a lower price for your current home. The total swing from both sides will most likely add up to a 3%-6% of the purchase price of your next home.

DC Condo/Co-op Market is HOT!

Ask agents in Washington, DC about the market for condos and co-ops right now and they will respond that the market is hotter now than it has been in many years and that multiple offers and pricing strength are common. While that might seem like hyperbole or wishful thinking, it’s not. The numbers bear out the perception. The Greater Capital Area Association of Realtors have released the March 2012 condo and co-ops statistics, here's a link to them: http://bit.ly/IpGjY6

Like all markets, the real estate market is driven by supply and demand. This spring supply is far down and demand is up.

Supply

The number of available condos/co-ops is the lowest it has been since 2005. As of the end of March there was a 27.9% drop in available homes on the market from a year ago (833 vs. 1,156). Interestingly, the inventory is down 50.5% from the peak of inventory in June of 2006 (833 vs. 1684).

Perhaps more important than the percentages is that this low level of inventory indicates that inventory is likely to remain tight for the rest of 2012. That’s because in Washington, inventory of available homes increases to the highest level in the spring and declines throughout the year to a low level in December. This year the increase in inventory is 43% of what it has been for the last six years. (Typically, inventory rises 23% between December and March, this year the increase has only been 10%.)

As one other point of reference, the last time inventory was this low in the spring was in 2005, which was the peak of the market in Washington, DC.

Demand

The demand side is a little more nuanced than the supply side, but the news is good here too. Contracts were up 18.2% compared to last year for the same month (358 vs. 303). This is the first time since June 2008 that we’ve had this level of contracts (without government intervention).

The government intervention I’m referring to is the $7,500 federal tax credit for buyers of homes that ended in April of 2010. In March and April of 2010 contracts exceeded 350 as buyers rushed to close before the end of the credit.

Bottom Line

So with supply down and demand up, what does this mean? It means that we’re seeing the market price for properties firming up, but not great price appreciation. The reason the properties are clearing quickly and demand is up is because sellers have finally capitulated and are pricing their homes where buyers want them.

If you’re a seller and your home has been on the market for three weeks or more your home is priced too high by at least 5% and perhaps more. Properly priced homes are selling in two weeks.

If you’re a buyer the time to act is now. This doesn’t mean you should simply buy anything, but if you find a very desirable home don’t be surprised by multiple offers and the possibility of paying above the list price.