Ask Brian: Buying When Contingent on Selling in a Tight Market



Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to askbrian@realtybiznews.com.

Question from Cliff in Salt Lake City: Hi Brian, I’m in a situation that I think a lot of buyers are in but I don’t see much information about. My situation is that I want to buy a different home but I can only do it by selling the home I’ve had for six years. So, my question is, how do I buy another home contingent on selling the home I now own?

Answer: Hello Cliff. Cliff, the good news is it’s a sellers’ market. The bad news is it’s a sellers’ market. In a seller’s market, contingencies of any kind weaken your offer. I know it’s not one of your options but for comparison, an all-cash offer without any contingencies is at the opposite end of the spectrum. An all-cash offer without any contingencies means the deal can close immediately because there is no “only if” clause in the contract. That’s exactly what a contingency is. It means the buyer will buy the house “only if….” something else happens. Cliff, in your case the “only if” clause is “only if you sell your home.” And then you have to wait for your sale to close before you can move on the closing on the new home. Now, what happens if you accept an offer from a buyer that has a contingency to buy your home “only if” they obtain financing, or “only if” the house passes inspection, or “only if” the appraisal is approved by the lender. I think you get the point; one contingency can lead to a string of contingencies. That’s why any contingency weakens a purchase offer although some contingencies are less daunting to the seller (inspection and appraisal contingencies are less daunting). Buying with a contingency on selling is one of the most problematic contingencies but there are ways to mitigate it. Here are some of the most common and effective mitigation methods.

Sell your home first. People don’t like this because it can mean having to move twice in a short period of time. You sell your house and rent somewhere else until you buy your next home. But you might be able to make this work without you having to move twice. You can try selling first and then renting your own home back for a few weeks or months until you buy your next home. You may or may not have to accept a lower sale price but you’ll almost certainly have a limited number of months (or weeks) before you have to vacate your sold house. There are variables that you can try such as making the offer to buy your next house contingent on a fast closing. That can shorten the amount of time you have to rent back your existing house.

Make an aggressive purchase offer. You can offer a slightly high purchase price for the house you are buying contingent on selling your house. The seller may or may not agree to continue accepting other offers. You want to clearly understand all the risks involved. The seller might accept your offer but reserve the right to accept another offer at any time or they might agree to lock in your offer to give you a specific amount of time to sell your home. One important decision you have to make is whether or not your earnest money is refundable. Also, the amount of earnest money you offer might be a determining factor in how long you are given to sell your home.

Escalation addendum. This is another version of an aggressive purchase offer. This allows your original offer to automatically increase but sets limits at the same time. You add a clause stating that you will exceed any higher offers by a certain dollar amount but at a price not to exceed a set limit. For example, let’s say another offer comes in on a home listed for $250,000. You can say you will go over the highest offer by $3,000 but not to exceed $258,000. This caps the most you are willing to pay without offering a higher amount before another buyer makes an offer. Something to watch out for is that the house will appraise for the amount that you set as your cap.

The kick-out clause (aka bump clause). As the buyer, you can write this clause into your offer. You can vary it in a way you and your agent see best but a common version is allowing the seller to continue accepting offers and if the buyer agrees to another offer, you have 72 hours to either remove your contingency or your offer is canceled. If you use this clause, be sure your earnest money will be promptly returned. Other versions of this are “Right of First Refusal” or “Continued Marketing.”

Negotiate closing costs. The first thing you probably want to do is forget about asking the seller to cover any of your closing costs. Instead, you might offer to cover some of the seller’s costs. This might depend on how much equity you have in your current house. You don’t need to have this money right now but you’ll need enough from the sale of your current house to cover your purchase closing costs plus anything that you agree to cover for the seller.

Bridge loans work if you have strong credit and enough equity in your current home. You’ll need to first be preapproved for this loan but it allows you to make a purchase offer on your next home without a contingency clause to first sell your existing home. Multiple variations can go into bridge loans such as when you start making payments or if you can repay the loan after you sell your existing home. Also, you might get better terms if you agree to take out a mortgage on your next home through the lender making the bridge loan.

Work with a realtor. This is a time when you most need the help of an expert to coordinate negotiating two deals simultaneously. Although selling and buying at the same time is challenging in this market, it’s not new to realtors. These are the people who know what will work best in your local area.

Cliff, many variables go into which option might work best for you. The more equity you have in your current house, the more of these options that will work for you. For instance, more equity makes it easier to get a bridge loan and it also enables you to make a higher purchase offer for the house you want to buy. Also, the house and neighborhood that you are selling in make a difference. If houses in your neighborhood are typically receiving offers in a week or two (entry-level houses), you can start looking for your next home with more confidence and might be comfortable structuring a contingency offer with a seller’s kick-out clause. On the other hand, if houses in your neighborhood aren’t selling fast, you may have to sell first before making an offer to buy another house. And one final note. Even if you have a buyer and your existing home is in escrow, you may want to insert your sale’s contingency. Sales do fall through and this contingency protects you from losing your earnest money if that happens. However, this contingency still makes your offer weaker to the seller in a competitive market.

Here’s your chance to help many people out by sharing your unique method for both selling and buying in a short amount of time? Please leave your comments.

Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to askbrian@realtybiznews.com.

Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 12 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, near a national and the Pacific Ocean.

Comments

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