Watch Out for Sale Contingencies When Selling a Property

More than ever before, investors must consider their tolerance for the market, both in terms of the properties they choose and the carrying costs they can afford. Today, it is not unusual for properties to be on the market in excess of 120 days, and inaccurate projections or underestimates of carrying costs can lead to losing propositions. Be reasonable, but cautious, in running the numbers on a foreclosure investment.

Consider Offers Carefully

Finding a suitable buyer and reaching agreement on price may in fact represent the biggest hurdle to getting your next deal done, but bear this in mind. Even when a seemingly acceptable buyer comes along, it is important that you as the seller do not accept an offer without regard for its content.

Market conditions and the shift from "seller's market" to "buyer's market" in recent months have led to an increase in the number of contingencies contained in buyers' offers. That's fine and to be expected. Even though most buyers will satisfy most contingencies most of the time, sellers should weigh that likelihood before accepting the offer. There is nothing more disheartening to a seller than a buyer who has allowed him or herself a legitimate out, leaving the seller with nothing to show for it other than lost marketing time.

To that end, I have outlined below some common contingencies that can be found in offers to purchase and purchase and sales agreements. Scrutinized properly, their exclusion or careful drafting can give one party an added edge in the contract process.

• Inspection Contingency. Generally, these are contained in the offer and expire prior to execution of the purchase and sales agreement. It is typical for inspections to occur within seven to ten days of the offer to purchase.
  
  While there are few limitations that a seller can put on this type of contingency, a key point here is to require a short window of opportunity for the completion of said inspection. The sooner it is done, the sooner you can get the buyer to commit or move on. Do not let this contingency survive into the purchase and sales agreement.
  
  
• Radon Contingency. A radon inspection is typically done in conjunction with the home inspection. There are occasions when the results are not returned prior to execution of the purchase and sales agreement and the contingency carries over to the purchase and sales agreement.
  
  A carefully drafted radon contingency, however, will allow for a seller to remediate the levels of radon if found to be high, without giving the buyer the freedom to terminate the agreement simply due to the initially high number. In other words, the agreement should be written so that if high radon levels are discovered but remediated, the requirements of the agreement are satisfied and the deal goes forward.
  
  
• Mortgage Contingency. This clause exists in most offers and typically allows a buyer 14 to 21 days from execution of the purchase and sales agreement to secure financing. (Behind us are the days when multiple offers would inspire buyers to leave out a mortgage contingency entirely.)
  
  As the seller, make sure to require the buyer to include a specific loan amount in the contingency. As with inspection contingencies, the shorter the length of the contingency, the better it is for the seller.
  
  Certainly, sellers can give themselves some level of comfort by requiring a "pre-approval" letter from the buyer. Be forewarned however, that in no way does a pre-approved buyer guarantee the sale. Most pre-approvals are conditioned on appraisal of the property, for which lenders have wide discretion. Likewise, "Pre-Qualification" letters should give even less of a sense of security for sellers, as in most cases these do not consist of any verification of information provided by buyers.
  
  
• Sale of Home Contingency. The recent surge of these types of contingencies can be directly attributed to the tougher real estate market. Rest assured, we will continue to see these contingencies, as long as buyers are determined to sell their existing property before purchasing a new one.
  
  From a sellers' perspective, the contingency should lapse upon the buyer entering into a contract to sell their house, not upon a successful closing of the buyers' sale. Furthermore, sellers would be wise to include in the contingency a clause which states that if another buyer makes an offer not contingent upon the sale of their home, that the seller can terminate the first agreement. At the very least, the clause should force the first buyers to drop their sale of home contingency or face losing the house.

In summary, changing market realities require changing investment strategies. Until the pendulum swings back the other way (as it inevitably will), sellers need to pay particularly close attention to the details of any transaction. While you may not get all that you ask for in negotiating contingencies, make sure you understand what these are and how they work before signing on the dotted line.