When to Stop the Clock Before Clinching the Contract

When it comes to crazy contingencies, sometimes the best thing Realtors® can do for their clients may seem risky. But when a Realtor® knows the market thoroughly and has done the due diligence, the risk isn’t as scary as it seems on the surface.

When Susan Leavitt, a Realtor® with McEnearney Associates in Alexandria, served as the listing agent for a $1.475 million home in Kent in D.C., the buyers’ offer included not just one, but two sale-of-home contingencies.

“The buyers asked us to strike out the kick-out clause, which seemed crazy since they had two homes to sell, but I knew both of their houses well and knew they would sell quickly,” says Leavitt. “There weren’t any competing offers and the buyers loved the house. They met all the deadlines within 30 days and the sale went through.

“The last thing sellers want is to lose their buyers; so sellers who are worried about alienating buyers tend to accept more contingencies,” says Leavitt.

As with most aspects of real estate transactions, the decision to include contingencies in the contract and whether to accept them depends heavily on market conditions. If owners see average days on market creeping higher or their home sitting on the market, they’ll be excited to get any offer, says Reggie Copeland, broker and branch manager of Long & Foster Real Estate in Arlington and Alexandria.
 
The most common contingencies that buyers want to include are the home inspection and financing contingencies because they’re most worried about buying a house that needs a lot of work or their loan falling through, says Traci Oliver, a Realtor® with Coldwell Banker Residential Brokerage in Fairfax.

Besides the common contract addendums, some quirky contingencies get written into purchase offers.

“One buyer who was relocating to this area wanted to make the contract contingent on the receipt of a formal job offer in writing,” says Oliver. “Usually sellers won’t accept something like that because if they take their home off the market while they wait for that written job offer they could be losing out on other purchase offers.”

Leavitt says she represented a buyer who wanted a two-week contingency dependent on her receipt of a contract renewal from the World Bank. The sellers asked for the buyer to increase her earnest money deposit from $10,000 to $50,000, which she agreed to do. Her job contract was renewed and the transaction was completed. 

“If everyone realizes that both sides have the same end goal, it can make negotiations much smoother.”

Local Realtors® say they experience the most delays and challenging negotiations around the home inspection, appraisal and sale of home contingencies. In recent months, financing issues have not been a problem for Realtors® because buyers are better prepared with a solid loan preapproval and listing agents carefully vet buyers’ financial status before recommending that an offer be accepted. 

“As a seller’s agent, the fewer contingencies in a contract, the better,” says Coral Gundlach, a Realtor® with Century 21 Redwood in Arlington. “Our market’s stayed pretty solid overall so the question more often is ‘how many contingencies are you removing’?”

HOME INSPECTION CHALLENGES
Gundlach says that some buyers treat the home inspection as a chance to renegotiate the entire contract.

“Buyers want the house rebuilt to their specifications and sometimes their expectations are a little extreme, such as one buyer of a 30-year old house with a 10-year old deck who wanted the deck entirely replaced because it wasn’t up to the current code,” says Gundlach. 

The issue at the crux of home inspection contingencies is that sellers think their home is perfect the way it is and buyers want a home to meet their high standards, says Leslie Hutchison, a Realtor® with Keller Williams Realty in Falls Church. 

“A home inspection report can show a lot of little things that the sellers couldn’t have even known about, such as the water heater not being properly vented when it was installed,” says Hutchison. “In that case, the sellers had a new one installed two years ago and when they contacted the company they were told it was installed properly. The home inspector and the buyers insisted that they fix it anyway.”

People often disagree about whether repairs were completed properly, says Deb Pestronk, a Realtor® with Long & Foster in Reston. Pestronk says some buyers who are overly concerned about home inspection issues might be better off buying a new home. 

“Home inspectors need to prove their value and must provide a report to buyers, so sometimes they mention things that shouldn’t be an issue, such as evidence of a prior water leak under the bathroom sink,” says Pestronk. “Every house has had a water leak at some point and it’s only an issue if it’s a current leak.”

She says a good agent will be able to view home inspection issues from both sides.

“I tell buyers that if the sellers have lived in a house for 30 years, chances are there’s nothing wrong with it,” says Pestronk. “If they haven’t fixed something before they’re usually not going to fix it now. I always try to seek out a price reduction for buyers rather than have the sellers fix something, because no buyer is ever satisfied with the work the sellers do and sellers always think they’ve gone out of their way to do the right thing.” 

Pestronk says that the bottom line is that you can find things that need to be changed in any house.

“It’s best if both agents realize that the transaction doesn’t have to be an adversarial process,” says Pestronk. “If everyone realizes that both sides have the same end goal, it can make negotiations much smoother.”

FINANCING CONTINGENCY ISSUES
While Oliver says sellers worry most about home inspection issues, she says she worries less about potential inspection issues because the problems can be fixed or negotiated. She worries more about the financing and appraisal contingencies because Realtors® and sellers have less control over them. However, she says, most financing contingency problems can be avoided by Realtors® obtaining a solid lender letter and doing their due diligence before an offer is accepted.

One issue that Copeland is seeing more of, particularly in transactions with multiple offers, is an alternative financing contingency.

“One of my listing agents received four or five offers and so the agent and the seller were able to choose the strongest offer and the most financially stable buyer,” says Copeland. “They picked a buyer who was making a big down payment and using conventional financing, but then after the contract was accepted the buyer switched to VA financing.”

Copeland says that paragraph 15 of the new purchase contract allows alternative financing, but he says sellers need to sign an addendum if the purchaser plans to use FHA or VA financing.

“Sellers don’t have to accept FHA or VA financing if they don’t want to, and some lenders won’t move forward with the borrowers’ application if the addendum hasn’t been signed,” says Copeland. “There’s no problem if the sellers are willing to sign the addendum, but if not, the buyer may have difficulty getting financing.”

Copeland says many buyers know they want to use VA financing but listing agents think VA loans are tougher to get through because of their appraisal standards. 

“Some sellers will sign the VA financing addendum after the appraisal is complete just so they know the loan will go through,” says Copeland. “This is definitely a problem that can slow down a transaction and we’re seeing this more often when there’s a lot of competition for a home.”

APPRAISAL CONTINGENCY PROBLEMS
Whether buyers need a VA, FHA or conventional appraisal, a low appraisal can cause problems during a transaction. 

“When I’m representing the sellers and an offer comes in with the appraisal contingency waived, that’s like getting a golden ticket since it means the buyers have flexibility with their cash,” says Gundlach. 

Purchasers with unlimited cash can easily waive the appraisal contingency if they wish, but Gundlach says buyers with less cash can modify a contract with a “make up your own appraisal” tactic.

“It all comes back to good will,” says Leavitt. “If the buyer really wants to buy and the seller really wants to sell, then both sides are more willing to negotiate their way through any contingency.”

“Buyers can write into the contract an exact amount that they would be willing to pay if the appraisal comes in too low and their loan amount is smaller,” says Gundlach. “This way, they’re drawing the line where they’re comfortable and yet not waiving the appraisal entirely.”

Gundlach says sellers are willing to accept this type of contingency depending on the exact numbers involved and how eager the owners are to sell their home.

Leavitt says she tries to shorten the appraisal contingency to 18 days when she represents buyers in order to make their offer more attractive, as long as she knows the lender will be able to schedule an appraisal quickly.

As a listing agent, Oliver says she tries to control the risk of a low appraisal by pricing the home correctly and using accurate comps. 

“I always make appraisers aware of the comps we use to price the home,” says Oliver. “There’s still a risk of a low appraisal, but that can mitigate the risk somewhat.”

SALE OF HOME CONTINGENCY
A riskier proposition, one that some listing agents recommend that their sellers never accept, is an offer contingent on the buyers’ sale of their own home. Gundlach says she thinks this contingency is the worst to accept because it can have a domino effect on multiple sales if one home is slow to sell. She says under some market conditions and in some price ranges it makes sense for sellers to accept this contingency, but not when the market is robust.

“I discourage sellers from accepting a sale of home contingency because it’s very risky for them to take their home off the market while the buyers sell their property,” says Oliver. “It definitely complicates things for both the buyers and the sellers, but under certain circumstances it makes sense to accept this contingency. There has to be a perfect storm to line up the sales for the right prices and the right timing.”

Hutchison says she sometimes counsels sellers to accept a sale-of-home contingency if they’re not in a hurry to sell because buyers are often willing to pay a higher price in order to get the sellers to agree. She talks to the buyers’ listing agent and researches the market to estimate how quickly she believes the purchasers’ home will sell before recommending that sellers accept this contingency.

“I ask sellers who are hesitating to accept an offer contingent on the buyers’ selling their home whether they think it’s easier to sell a $1.5 million house or a house priced in the $700,000s,” says Leavitt. “More sellers are willing to accept this contingency because move-up buyers in that price range need to sell their home to buy another, and, depending on the house, it usually is easier to sell a place in the $700,000s.”

Market conditions, price ranges and individual circumstances dictate many of the decisions made by buyers and sellers about contract contingencies. 

 “It all comes back to good will,” says Leavitt. “If the buyer really wants to buy and the seller really wants to sell, then both sides are more willing to negotiate their way through any contingency.”

Michele Lerner, a freelance writer based in the Washington, D.C. area, has been writing about real estate and personal finance for more than 20 years for print and online publications.