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How to use Contingencies
Everyone is familiar with the conversation where the other person says, "Yes, but.." This person is agreeing with you but only if certain conditions are met.
A purchase agreement is similar in that you are agreeing to buy a property subject to certain things being met. The conditions you set are called contingencies.
It is uncommon to have a purchase agreement without contingencies. In fact, contingencies are an essential part of many offers. In general, contingencies are added to protect you (the buyer) but may also serve to protect the seller.
All of the contingencies of a purchase agreement must be met before the sale can be competed.
What are some Examples?
Contingencies can be virtually any conditions you wish to set. They can be anything such as having your Uncle John approve the central furnace or your Aunt Mary is satisfied with the kitchen sink. The sale is "contingent" upon all of the conditions being met. Contingencies are also called "subject to's" since the sale is "subject to" something happening.
An important contingency is a financing contingency. It states that the purchase is subject to the buyers being able to obtain a loan for the required amount. If you cannot get the loan you need, the sale is canceled and you deposit is refunded. It is very important to have this contingency since you will loose you deposit if you are unable to get a big enough loan. Making an offer without a loan contingency is very risky.
What are Some Common Contingencies?
There are many contingencies that will protect you (the buyer). Here are some you will definitely want in your purchase agreement:
* You will be able to inspect the property and must approve the inspection.
* The sellers must disclose problems with the property and you must approve of such disclosures.
* You will be allowed to make a final inspection of the property just before the deal closes and confirm that there is no new damage since you originally inspected it.
* You will get your deposit back if the sellers back out.
* You can back out if you are unable to get financing.
Depending on your situation, there are many other contingencies you should add. For example, if you are moving to the area because of a new job. You will want a contingency stating that if you don't get the job, you can cancel and get your deposit back.
Make sure that you clearly state your needs to the agent or attorney preparing you agreement. If there are any special conditions that must be meet (such as being able to cash in some stocks for a down payment), make sure it is in writing a contingency. Otherwise you may be unable to complete the purchase on time and lose you deposit. In some cases, you may be sued by the sellers for performance. They may demand you complete the purchase or pay associated damages.
Who Writes In the Contingencies?
A contingency is a legal document and must contain the proper language to be legally binding. For this reason, attorneys ideally craft contingencies. However, since this is a normal part of business, many real estate agents are extremely versed in writing contingencies. In fact, agents may be far more experienced in this area than an attorney. In practice, your agent will be more than capable of writing the contingencies you need.
Whom Does the Contingencies Protect?
The contingencies noted so far are intended to protect you (the buyer). They allow you to back out of the deal without consequences if something does not work out -- you can't get financing, you discover problems with the house, you lose you job, etc..
As noted, contingencies may also be added to protect the sellers. Such examples are the sellers may insist that the transaction be completed within 30 days. If you are unable to get you cash together or get your financing, you could lose the house and your deposit!
Some sellers may want you to purchase the house "as is." That is, no matter what's wrong with it, the sellers won't be responsible for it. You may for example find that after making an offer, the septic system badly needs $15,000 worth of repair. If you agreed to buy the property "as is" then you will be stuck paying the difference.
Contingencies Can Become Deal Points
Naturally, you will want to have contingencies that benefit you (the buyer) and want to exclude those that protect the seller. This is therefore a process of negotiation where contingencies become deal points, which you can influence, the actual cost of the transaction.
A deal point is a specific point on which the deal depends. For example, you want the sellers to replace the broken sprinkler system. So you include a contingency stating that the sellers must repair it. If the sellers refuse -- perhaps they have been watering the lawn by hand and are unwilling to fix it for the buyers.
Now you have a deal point. What are you going to do?
Well, this depends on how important the sprinkler system is to you. If you feel that you can't live without it and are unwilling to budge, you can refuse to remove the contingency. The seller can either accept the offer or reject it. If the sellers accept, you've got your sprinklers. However, if they reject, you're not getting your new home.
Often a better way if dealing with this situation is to calculate the cost of repairs and adjust the contingencies to compensate. For example you may retract your contingency for the sprinklers and insist that they leave the ceiling fans you really like. Perhaps the sellers were not looking forward to taking them down anyway and are willing to compromise on this point. In which case, although you will need to get the sprinklers fixed, you have saved several hundred dollars on the purchase of new fans.
You Can Use A Contingency to Get Yourself a Better Deal
The skillful negotiator will use contingencies to improve the deal. And there is really no limit to the type of contingency you can craft. Deal points can be over anything ranging from the date escrow closes to the specific closing costs the buyer and sellers must pay.
A great way to start negotiating is to find the sellers weak point and apply the pressure there. For example, the sellers may absolutely need to close the deal within 25 days so that they can purchase a new home. You agree as long as they fix the septic system, lower the price, repair the sprinklers, and leave the ceiling fans. In this way, they have met their criteria by giving you the superior deal.
Remember, that although contingencies are great points for negotiations, they are there to protect you. They offer you an easy way to back out if something goes wrong.
Avoid Unnecessary Contingencies
Sometimes when buyers discover the great protective value of contingencies, they insist that extra ones be placed in the purchase offer. For example, you insist that the purchase become contingent on you not losing your job before the deal closes. (You pretty much get this protection in any event, since if you lose your job, the lender probably won't give you a mortgage, and you can back out using the financing contingency.)
Or you insist that the deal be contingent on your not getting ill during the escrow period, or your spouse not falling out of love with the home, or your getting approval of the purchase from you parents. Remember, you can make the deal contingent on anything!
The problem is that each time you add a contingency, you weaken the deal. The sellers ask themselves, "Why does the buyer insist on this?" If the quickest answer is that the buyer is wishy-washy and may not go through with the deal, the sellers may simply refuse to sign. You may squash a perfectly marketable deal simply by insisting on unnecessary contingencies.
As many real estate agents have witnessed, lawyers can ruin an otherwise marketable deal by adding contingencies favoring their clients to the point where the other party simply won't go along. While legal advice is great, sometimes common sense and human nature play a stronger role.
For more information please contact:
Joe Crain
Century 21, Smith & Associates
(210) 710-3270
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Reject the Buyer's First Offer
This type of strategy works best in a normal to hot seller's market. Rejecting the first offer might cost you the deal but in the long run you could end up coming out ahead. Use this information as more of guideline than a rule.
In a cold market, depending on the number of offers, rejecting the first offer may not be the wisest choice. For example, the market prices are depressed. You have your first bite in six months. It is safe to assume that this may be your only offer and you should accept it.
Why should you reject the first offer?
A buyer's first offer does not always reflect the buyer's highest bid for your property. From the buyer's perspective, there are three goals in making the offer:
Buyer's Goals in Making an Offer
1. To get the property for the lowest possible price.
2. To get the best possible terms.
3. To "feel out" the seller to see how "motivated" he or she is.
All of these goals speak toward making a low initial offer. Why offer $300,000 to a seller that might accept $270,000? Always offer the lower amount first. If the seller doesn't accept it, you can always offer a higher bid.
When the Market's Super Hot
In some areas of the country and at different times, there is such a high demand for property but a shortage of land. Multiple Offers come in as soon as the property is listed (sometimes before the listing is even published!). In this situation, desperate buyers make their highest and best offer first. The seller has a choice again to reject the first offer. After all, someone else is likely standing in line to offer more!
Will the buyer Offer More?
In a normal market, the answer is "maybe." If the buyer low-balled the first offer, then indeed they will offer more. Even if the buyers offered what they considered their best, they might stretch and still offer more if they really want to buy your house.
The market is fluid and stands still for no one. You never know what a buyer is thinking, or what other properties a buyer is considering. In the time since the first offer was made, the buyers may have reconsidered. They may have decided that they really don't want to buy into another house. Perhaps they'll rent for a time. Maybe they've seen another house that they like better.
This is the risk you take when you reject any offer. You may not get another offer from this buyer. You may not even get this buyer to come back and honor the original offer. The consequences do sound scary but if you want the most for your house then this is the tactic to consider.
Counter Offers
If you don't accept the buyer's offer exactly as presented within the time frame it is offered, you've rejected it. Now it's time to make a counter offer.
You can't accept and counter. The moment you make a counter offer for a different price or terms, it's a whole new ball game. The buyer is under no obligation to accept your counter offer and can now accept or reject it.
You should always counter any offer that you reject, no matter how frivolous the original offer may seem. I've been in a situation (in a normal market) where a would-be buyer came in with an offer that was 25 percent less than I was asking. The house was listed at $200,000 and the offer was for $150,000.
Now, that's an affront. It is insulting to be offered so much less that the asking price, particularly since the house didn't have any particular problems that could have knocked down the price. My gut reaction was to tell this would-be buyer to take a great flying leap and simply forget about him.
However, this is business and you never know what a buyer is thinking. So I countered back, at $5000 below the asking price, indicating that I was firm and would not budge. You know what? The buyer accepted! He had simply been low-balling me to see if I was a desperate seller.
The point here is even if you think the buyer is insulting you, even if you think the buyer is insulting you, even if you can't stand to think about this ridiculous buyer, always counter.
Once you've decided to reject a would-be buyer's offer, it doesn't cost you anything to counter. You can counter for close to your asking price, your actual asking price, or even for more than you're asking! What's important is that you not be the one to close the negotiations off. Keep them open by countering.
When Should You Accept the First Offer?
There are times when you should accept the first offer, and it doesn't always have to do with market conditions. You may be desperate to sell. It could be a matter of a financial crisis (you've lost your job and can't make the payments), a divorce, a transfer, or any of a dozen other problems that have cropped up. The point here is that you need to get out now, and you can't afford to dicker. When your back is up against the wall, you may not be able to risk negotiating for a higher price. You may simply have to accept what's on the table.
Hopefully, you'll never be in this position. But if you are, recognize the situation for what it is and act accordingly.
Never gamble if you can't afford to lose. Never reject an offer you can't live without.
For more information please contact:
Joe Crain
Century 21, Smith & Associates
(210) 710-3270
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