Stuck in the Middle — Contingent Offers: Help! I Need to Sell Before I Can Buy

Today’s rapid and competitive real estate market has many folks stuck in limbo because they need to sell their home before they can buy another one. Sellers worry that if they list on the market before finding a new home, they’ll end up homeless. On the other hand, such a competitive market means that it’s unlikely to get an offer accepted that is contingent on the sale of another home.

Inventory (homes for sale on the market) is extremely tight, and they pend (have a pending offer) very quickly. Rentals, especially for rural folks with animals, are few and far between. How in the world can a person navigate this tricky scenario and leverage the equity in their current home and either upgrade, or downsize, into a home that’s the perfect fit for them now? Here are the options and the conversation we have with our clients who are in this exact position.

A contingent (CT) offer means that the buyer is offering X amount of dollars at X terms — but only if their current home can be listed and pend within X amount of time. There’s almost always a bump clause, meaning that the seller of the home that’s being offered on can accept another offer (after giving the current buyer notice that they must remove the contingency in X number of days and perform on the subsequent terms of the contract) or back out of the contract. Once the buyer’s home goes under contract, that contingency is removed (the buyer can no longer be bumped) but the sale still is contingent on the successful closing on the buyer’s home.

Though the market is strong, having the success of one sale dependent on the success of another sale just means more moving parts. A seller is unlikely to accept this sort of offer unless it’s quite a bit stronger, or there are no other offers. We advise our buyers making a CT offer that they should be prepared to make a very aggressive offer in terms of price, earnest money, and inspection items.

Listing a home while under the pressure of a CT contract may mean that the seller must price that home competitively and perhaps accept an offer slightly lower than they otherwise would have. If our clients plan to go this route, we suggest that they prepare their current home as if they are ready to go on the market ahead of time. We take professional photos, video, drone, 3D tours and have the listing prepared and comps ready to present to the seller’s broker if they have questions about the buyer’s property. We want all our ducks in a row and facing forward. If an offer is properly presented and the process is well prepared, it’s possible to successfully make a move in this market.

There are other options to bridge the gap between selling and buying such as short-term rentals, staying with family, or piling into an RV—all solutions we’ve seen.

Another option for selling first is a HELOC (home equity line of credit) or a bridge loan. A HELOC can be used if the source of the down payment funds is tied up in the current home and are needed for the purchase of the next home. HELOCs usually require an appraisal, but don’t have many fees associated. The interest rates usually run about 1% above the prime rate and adjust with the market, dependent on credit score. For the down payment funds to come from a HELOC, the buyer must have the borrowing power to carry the mortgage of both properties in their DTI (debt to income) ratio, and that can be a stumbling block. Bridge loans are designed to help purchase a new home with an intermediary loan, but generally have higher fees and steeper penalties as they are designed to be short-term. It’s important to understand that process and potential penalties.

The final option that we have been able to execute successfully is based on the concept that in this market, the seller is king. It’s completely feasible that a seller can list and sell a home with a substantial rent-back period included that allows time for a new home to be purchased. This means that the seller sells their home, with the contractual allowance that they stay in that home for X amount of time either for no rent, or for a negotiated rent. Buyers trying to get their offer to stand out in the crowd may offer these terms.

No matter the direction a seller/buyer goes, the most important thing they can do is select a Realtor® with experience, good communication skills, and excellent referrals. I see folks make decisions on who they work with based on commission alone and wish that I could impress on them how much more money is saved or gained by how the process and transaction is handled, than by how much the Realtor® is compensated for their part. The adage, “you get what you pay for” has never been so true as in the real estate market.

Don’t be afraid to make a move. The more sellers who make the decision to list, open the market incrementally with each listing. This market is in desperate need of more inventory. Find a trusted professional and make a move this year to that home or ranch of your dreams!

 

See this article in the March/April 2022 online edition:

March/April 2022

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