Chapter 3 in our series: What Kills Pending Real Estate Sales.
A buyer and seller agree on a price; the deal is under way. The inspection goes well. The appraisal looks good. Everybody’s happy and excited…and then…bang, the buyer can’t get financing, so the deal is off.
All that hard work and effort…gone in an instant.
The buyer’s ability to obtain financing is one of the two most common contingencies in a real estate transaction, along with the sale of the buyers current home. The conventional wisdom is that contingencies favor the buyer, who often has the challenge of selling a current home coinciding with the purchase of a new one. But conventional wisdom is not always, well…wise.
Are contingencies always potential deal-killers? It really depends on the market, and the situation of the parties involved. Whether you are a buyer or a seller, if you get smart on the risks and rewards of contingencies, you’ve added another tool to your toolbox for making (and closing) your best deal.
Follow these tips to make sure you get the best outcome.
Know the market
In a hot (seller’s) market, contingencies might feel like a pair of handcuffs, for both buyers and sellers. For sellers, the last thing you want to do is tie yourself down and forgo hard offers while you sweat out your buyer’s financing. And for buyers, if you are not equipped to make an all cash offer, you will likely miss out on properties you really want.
In a soft market, however, buyers may see accepting contingent offers as a way to reach more potential buyers and effectively increase the sale price. And for buyers, you now have more options and more leverage in obtaining the property you want at the price you want, as well as making your transition between homes much easier.
Do your homework
Not all contingencies are created equal. For sellers – you can weigh the risks. How good is the buyer’s credit? What is the value of the new home compared to the old one? These are things you should know about before you decide to accept or reject a contingent offer.
For buyers – if you have great credit, you can make your contingent offer more attractive to sellers by making sure they know about it. Likewise, if you have a lot of equity in your current house, don’t be afraid to put that information out there. If you can’t make an all-cash offer, you can still make yourself a more “bankable” risk in the eyes of the seller.
Buyers and sellers have a shared interest in completing the sale, so both parties should be prepared to consider alternatives if contingencies cannot be met. One of the best solutions is a bridge loan, a short term (6 months or less) loan that is tied to the equity in the buyer’s current home and effectively gives the buyer the ability to make a cash offer. For equity-rich buyers with poor credit, this can be a great way to mitigate the risk for sellers and increase your buying power.