FSBO-- downsides of accepting contingency offer?

threepinktreesMarch 16, 2014

So, tomorrow will be our third showing in as many days. The couple coming tomorrow needs to sell their starter home before they buy. My husband and I have been thinking that if they make an offer we might as well accept it with a 24 hour bump clause. Our thinking is that since we're FSBO it's not like it changes our status on the MLS because we aren't on the MLS, so we might as well have an offer simmering while we keep showing and marketing the house.

Am I missing something? What are any and all downsides to this scenario?

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redcurls

Get a decent deposit. If they have to sell first before they even have the cash for a deposit, they aren't qualified, in my opinion.

    Bookmark   March 17, 2014 at 1:00AM
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ncrealestateguy

My thought is you should not have to deal with a contingent offer. Tell them to come back when they are ready, able and willing.

    Bookmark   March 17, 2014 at 5:26AM
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jewelisfabulous

You're right: since you would also be a FSBO, accepting a contingency offer with a 24 hour first right of refusal won't kill off showings like it would if your listing was on the MLS. You probably wouldn't even have to tell a buyer who submits an offer that you first have to give the first buyers a chance to remove their contingency before you can reply to their offer (because a 24 hour response to an offer is pretty standard).

The downside I see is: since your first buyer is saying upfront that he/she can't close without selling his/her house first, there really isn't anything stopping them from removing the contingency in the face of a competing buyer but failing to close anyway when they can't qualify for financing.

Yes, you could sue for specific performance at that point, but that'll eat up a ton of your time and money better spent on searching for a new buyer. Plus, what judge is going to force someone into buying a house they can't afford?

So, in the end, my advice is to also tell the buyer to come back when his/her house is under contract.

    Bookmark   March 17, 2014 at 8:19AM
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chispa

The buyers are probably afraid of ending up "homeless" if they get a contract on their house and threepinktrees' house also gets a contract. Tell them to sell their house contingent on sellers (them) finding a move-up house. This will give them a few weeks to find a move-up house or be able to cancel the sale of their current house. If they have a starter house, I would assume most of their buyers are coming from rentals, so they should be ok with that contingency for a few weeks.

I haven't seen that contingency in a while but have seen it used by empty nesters downsizing. They didn't have to sell, but wanted to take advantage of a hot market for their current property, but only if they could find the perfect house to downsize to. It can work.

    Bookmark   March 17, 2014 at 12:13PM
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threepinktrees

These responses have prompted another question. At what point do I consider their house 'sold'? Do they just need to have a buyer who's already obtained financing and have a closing date, or do I actually wait until it's closed?

Chispa-- I think that is their concern. They've been looking for the 'perfect' house for a while. In our town it's difficult because it's a small town and these buyers have very specific things they're looking for-- namely an updated home in the historic district (which is a very small neighborhood). They currently live in this neighborhood, but want a bigger home. They don't want to sell unless they've found what they want, and it doesn't come available very often. Obviously, I still think they'd do better to sell first and then look, but I sympathize. I think your idea might appeal to them.

I don't know if it's regional or just a common problem, but I know people here think you should find a new home, then try to sell. We haven't even gone to look at any other houses, but people ask us all the time what house we're buying and we get raised eyebrows when we say we're just going to sell and then look for something.

    Bookmark   March 17, 2014 at 12:39PM
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nosoccermom

In my area, buying and selling at the same time is quite normal. Do you have an estimated guess as to how quickly they'd be able to sell their house?

    Bookmark   March 17, 2014 at 12:58PM
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jewelisfabulous

There is always an element of risk that some buyer down the home buying chain won't be able to close thus setting off a domino effect up the line.

A home isn't sold until paperwork has been signed and money and keys have changed hands. Up to that point, the financing contingency most every buyer includes in a contract allows them to walk away up to and including ON the day of closing if their lender pulls funding.

When we sold our first home, I insisted that the buyer's agent prove that the buyer of their home showed steady progress indicating his intent to purchase. It got a little hairy when, 4 weeks from when we were all supposed to close on our respective homes, he still hadn't made contact with a lender to secure a home loan.

Fortunately, it all worked out, but even with a contract in place, there is a huge element of trust that everyone down the chain is being honest with the full intention to purchase and conduct themselves in such a way as to ensure they'll get funding*.

*unlike the buyer our builder had who didn't understand they couldn't spend their downpayment on furniture for their new home and expect their lender to just "up" their loan amount to cover the purchase price.

    Bookmark   March 17, 2014 at 1:07PM
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threepinktrees

Nosoccermom-- if they still seem serious at the showing today I'm going to probe into that. Their home is much smaller than ours and in our town the homes in that price range go very quickly if they've been well maintained. It's a remarkably hot market here this spring and houses are 'flying off the shelves.' However, I need to ask some questions since if they need to overprice their current home to afford ours then we're headed for trouble.

    Bookmark   March 17, 2014 at 1:27PM
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linda117117

I am in the minority here. In my opinion, you have nothing to lose by accepting the contingency offer since you are not In MLS anyway. It gives you a little more negotiating power since any new offer will have to at least match what you have on the table. If you have a kick out clause, you are good to go.

    Bookmark   March 17, 2014 at 2:51PM
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chispa

threepink, you haven't even looked at other homes? What if you end up "homeless"? I would go to any/all open houses in your area to get a good feel for what is selling and why it sold at a given price. RE listings and pictures don't always tell the whole story about a particular property and seeing it in person makes big difference.

We've been fortunate over the years to be able to look first and make an offer, knowing that we would have no problem carrying 2 homes if we had to. Also fortunate that we never had to own 2 homes for more than 2-4 weeks and that was usually our choice so we would have time to paint/fix the new place before moving in.

    Bookmark   March 17, 2014 at 5:22PM
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threepinktrees

Chispa-- we've known all along we may end up 'homeless.' We plan on finding a temporary rental if it comes to that. It won't be fun, but we don't want to move again for a long time after we buy this time around. The trouble here is that things go really fast-- at least what we're looking for, which is a small acreage close to town.

There are no open houses now. They aren't common here and usually there is just a big open house day in April on one Saturday. Frankly there's not even anything on the market right now that's even close to what we are looking for.

We have, however, stalked the MLS for the past 5 years. We know what we want will eventually come on, so our plan was to hang on to our cash and be ready to spring.

I wish we could do it another way, it's just such a small market here, with very high prices.

    Bookmark   March 17, 2014 at 5:42PM
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ncrealestateguy

Let's look at both scenarios and their probable outcomes...
Accepting a Contingent offer...
You will be required to disclose that the home is under contract to all other potential buyers at first substantial contact. In my experience, buyers hate writing offers on a property that is already under contract. Most will just keep looking. In my 11 years of RE, I have never written an offer when their was a contingent offer already in place. Most buyers just keep looking. You will be missing out on these buyers if you accept a contingent offer. If you do accept a contingent offer, I would only do it after the potential buyer's deal was past the inspection phase. I would also demand seeing the contract, and pre qual letter of the buyer's buyer.
Accepting a contingent offer also means that you are going to devote the time it takes to get two deals done instead of one. Are you ok with that?

Not Accepting A Contingent Offer...
If a buyer comes to you and asks you to accept a contingent offer, you can explain to them that you would love for them to come back after the inspection phase of their deal is through. Chances are, if your home is still on the market when they get to their inspection phase, they are going to contact you immediately anyhow. After all, this is the home they want, right? If you are still Active, they will write. If you are under a contingent offer, they probably will not. So why lock your property up with a contingent deal and the associated elevated risks, waiting around for that deal to close, when chances are they will write up an offer anyways as soon as their place is sold? And missing out on those buyers who walked away because they did not want to get involved with a property with contingent offer.

In summary, I do not think that pushing the contingent buyers off for a few weeks until they are ready, is going to lessen your buyer pool. In fact, I think it enhances it by not scaring off ready, able and willing buyers, who will shy away from your home once it is under a contingent contract. Also, each scenario is unique. But from what I see, and from what you say about your market, I do not see you having to accept a contingent offer to get your property sold.

    Bookmark   March 19, 2014 at 7:58AM
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SaltiDawg

I have made offers on homes with existing contingency offers accepted by the seller and in place. In each of the cases, my offers included the requirement that the prior contingency no longer be in place within 48 hours (IIRC.)

In one case I ended up buying the house and in the other I did not.

    Bookmark   March 19, 2014 at 10:10AM
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rina_

I am in Canada, so shouldn't comment...but I quote treepinktrees:
Their home is much smaller than ours and in our town the homes in that price range go very quickly if they've been well maintained. It's a remarkably hot market here this spring and houses are 'flying off the shelves.'

That should solve your dilemma? Or maybe am missing something?
Often it makes sense to hire Agent, he/she will make sure you are getting qualified buyer, and advise you on accepting or not any contingencies - as per every specific situation. Offers like that are not 'evil', if you know what to look for/dealt with properly.
Agent has interest to help the sale along, they may be your best friend. JMO.

BTW, ncrealestateguy already mentioned that you are required to disclose to another potential buyer existency of another offer...(put yourself in their shoes)

Rina

This post was edited by rina_ on Wed, Mar 19, 14 at 10:33

    Bookmark   March 19, 2014 at 10:25AM
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jewelisfabulous

Life is a learning adventure! Towards that end, I would be very interested in reading more about FSBO sellers being required to reveal to a 2nd interested party the existence of an accepted offer that has a kick-out clause. Is there a legal statute? Is it a required response on the disclosure form?

    Bookmark   March 19, 2014 at 11:07AM
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rina_

Jewel654

You have good questions - I don't know what works in US. I should have keep my mouth shut...actually, we don't call anything here a 'kick-out' clause - we use an 'escape clause'...could be same thing, idk...Rina

    Bookmark   March 19, 2014 at 11:12AM
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jewelisfabulous

Thanks, Rina -- I thought revealing the existence of accepted "kick out" offer was only required of realtor represented properties....

    Bookmark   March 19, 2014 at 11:15AM
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threepinktrees

Nc-- Thanks, that was helpful. And as a follow-up to Jewel's question, is it a federal law to disclose other offers? And is first contact considered the phone call or email requesting a showing or just the first showing itself?

Rina-- I think realtors are great and completely agree that one would be very helpful. However, hiring one would cost us $16,000. We figured we'd give it a go on our own, and if we can't sell it then paying that 16 grand will seem more worthwhile. We discounted the price since it's a FSBO, but not a full 16k.

I'm thinking it might be good to call a real estate lawyer today so we've got one in the wings to look over any offer contracts we receive.

    Bookmark   March 19, 2014 at 12:45PM
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cmarlin20

I wonder also are some posters are commenting on licensed realtor rules vs FSBO.

    Bookmark   March 19, 2014 at 1:45PM
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ncrealestateguy

IMO, marketing a home for Active sale which is already under contract, is a misrepresentation, and by not telling someone who may write up an offer that the home is under contract, is omitting Material Facts, IMO. Just think of the outcome if you did not disclose this before any showing. Say you showed the home to a prospect that just loves it. Loves it enough to write up an offer. They call you to see how the best way to get you their offer. You then pop it to them that, "Oh, BTW, I forgot to tell you, it is under a Contingent contract...!" What do you think their first thoughts and feelings are? You got it... they are going to think... WTH!!!? And chances are, they will not write.
Be as courteous to all prospects as you would want to be treated. Let all prospects know that the home is under contract, but that they are welcome to schedule an appointment and go from there.

    Bookmark   March 19, 2014 at 8:27PM
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jewelisfabulous

I certainly understand what you are saying ncrealstateguy. From an ethical standpoint, disclosure and transparency is best.

From a LEGAL perspective, I am curious if there are any obligations for a FSBO seller to reveal an accepted kick-out contingency contract. If there is a legal precedent or statute requiring this type of disclosure from FSBO sellers, it would be the perfect reason to not accept an offer with a first right of refusal contingency.

    Bookmark   March 19, 2014 at 8:43PM
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threepinktrees

I'm with Jewel. I agree that not being transparent is bad, but I'm just curious as to what the actual legal obligations are.

    Bookmark   March 20, 2014 at 1:11AM
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rina_

I'll stick my nose in one more time...just to say that I agree with ncrealestateguy's last comment.

JMO: Legal or not, one should "Do to others whatever you would like them to do to you".

And to comment on treepinktree's last post - yes, I agree that commission is really lots of $$$. Depending on situation, that 16k spent could save lots of headaches and possibly $$$ too.
You realize that Agent has lots in stake - if he/she sells the house, gets paid. Otherwise, no income. That is pretty good reason to 'work the listing', I think. And, most agents do this full time unlike homeowner that probably has to work his/her job.

I am not at all against FSBO, just would seriously consider all options, and choose depending on market conditions and my own situation. And my own confidence - do I know answers to legal questions? Am I good negotiator? Could I look at my property realistically? Often, we may feel that our house is better than other, or may be emotional when it comes to other's opinion about our home.

No disrespect to any of the opinions here. I find buying/selling homes very interesting subject and experience. And, that is most likely biggest purchase one makes, so one has to be careful.

Again, I am sure it's very different in US than in Canada.
And yes, I have sold & bought few houses and condo apartments in my life. We still have very active market-just sold house in 5 days & received more than 100k over the asking (approx. 17% more). Asking price was realistic. Just that kind of market we have here.

    Bookmark   March 21, 2014 at 10:21AM
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rrah

I've not weighed in on this one yet, but I will now.

First if I was a buyer, took the time to see your FSBO home, and then discovered you had a contingent offer, that would put me off enough to move your home to the bottom of the list. It indicates a lack of honesty or sneakiness in my opinion to not mention this when the viewing is being scheduled. I would wonder what else you were keeping secret about the house and would say good-bye, no matter the hot market.

Legally, does a FSBO have to do this--no, but not doing so taints them as a seller in my opinion.

When I worked as an agent I did show buyers homes with kick-out contingencies. Part of it was because the length of the contingency was evident in the MLS--24, 48 or 72 hours typically. Buyers always knew this ahead of time, and I did give them the choice to view/not view. I was not afraid to show these houses, because I knew the odds were that my buyer could get the house if they wanted to move forward. Only once did my buyer not get the house when there was a kick-out clause. That was due to a lazy agent that had not changed the MLS status.

    Bookmark   March 21, 2014 at 11:43AM
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threepinktrees

Thanks all! These perspectives really help -- the potential buyer with the house to sell had a second showing yesterday so we'll see if we're faced with the decision or not, but it's made it a lot easier to think through.

Rina-- I have no problems with realtors and definitely value their services and advice. It was actually a realtor who suggested we try FSBO first due to the location and condition of our home. Since we are in no rush to sell as we don't have a home we'd like to purchase yet, we decided it would be worth a try. I am a good negotiater, the market here is very hot, and I have already contacted a lawyer to handle the legal aspects of the sale.

Rrah-- thanks for that input. It's very important to me that we be very scrupulous in our dealings, so I'm glad to know that people care a lot about knowing about contingency offers. I do not care at all if a home I was interested in has a bump clause as I feel like if I want it I don't mind giving it a try. It's helpful to know that it's a very big deal for people to know, so I can mention it right away if we end up in that situation.

    Bookmark   March 21, 2014 at 5:11PM
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