Contingency School

Dear Pat,
Our friends sold their house earlier this year to buyers who made a "contingent" offer. Now, two months later, the buyers' house still hasn't sold and our friends are stuck. Since we plan to sell this summer, how do we avoid such a pitfall? From what we've seen the negotiations can get pretty complicated, and we're…
---Still Learning

Dear Learning,
I salute your "diligent student" attitude, and I intend to reward it with a simple answer to your question by the end of class. But before you nod off, let's begin a short course in contingencies, both stated and implied, as they occur in a transaction.

Think of a contingency as an "if"--if A happens, B is decreed. For example, most purchase agreements these days are contingent upon buyer acceptance of the results of a private home inspection. When the buyer's inspection reveals problems, the buyer may offer to remove the written contingency if the seller agrees to make specified repairs. However, the implied contingency remains until the repairs are actually made, and the buyer could refuse to close unless the seller performs.

More examples: all offers other than cash are contingent upon the buyer being able to obtain financing; the house must appraise at or above the purchase price; the seller must provide marketable title. Although adequate preparation normally avoids problems in these areas, they are big Ifs that officially remain for many weeks after the purchase agreement is signed.

I've outlined just a few of the more obvious contingencies within the big bundle of promises between the buyer and seller that comprise the purchase agreement. Failure to honor ("perform") any of these promises can break the contract and sink the transaction. Thus, in the broadest sense, all offers are "contingent."

Thanks for staying awake in class so far, Still Learning. Now, to your question: the "contingent offer" you mentioned occurs when the seller agrees to price and terms offered by the buyer, but contingent upon the buyer actually selling his/her own home first. ("If I sell my home, I will complete the purchase of your home.")

The seller can continue to show his/her home, and may entertain other offers, but cannot accept any other offer until the original buyer has been given 48 hours (typically) to remove the contingency and proceed with the purchase, house sold or not. The obvious advantage to buyers is that it gives them more time to sell, and they can often remove the contingency if pushed by a competing offer. Sellers are not advantaged by the deal, however, since the task of continuing to show the home becomes much harder when other agents are informed that the home is already sold "contingent." I'd guess that it reduces showings by 80%. As a listing agent I've never advised a seller to accept this kind of contingent offer.

Still with me, Still Learning? Your friends have spent a long time on the market trying to overcome their "sold contingent" status. Here's how to avoid that pitfall: if you see a strong offer contingent upon inspection, that's great. But if it's contingent upon the buyer's house selling first, just say no.