Tuesday, November 19, 2013

How to make a "Contingent Offer" on a Sacramento home. AKA, how to concurrently sell and buy a new home...

A couple weeks ago, I wrote about how Sacramento home buyers wishing to "move-up" from one home to another home might go about doing that. There are basically four ways to sell your home and buy your replacement home...today I am going to describe in more detail how to make a "contingent" offer to purchase another home and then sell your current home.

A "contingent" offer is essentially one that hinges on the sale of your current home in order to complete the purchase of your replacement home. You are not obligated to complete the purchase of the replacement house until your current home sells. Sounds amazingly great right? Well, there are pro's and con's.

First let me explain how this really works and start with the basics...by all means, before you decide to do this -- start working with your Realtor and loan officer and lay out a game plan. Have your Realtor do an estimate of value for your current home and a "net sheet." A net sheet will itemize all of the costs associated with selling your home, like title insurance, escrow fees, property and transfer taxes, natural hazard disclosure, commissions, inspection reports, repairs, etc. It will also give you an estimate of how much money you will have left over at the end of the transaction to put toward the next house. I'd encourage you to plan for the worst case scenario and be somewhat conservative with the estimates -- for example, I typically base my estimated net sheets on the low end of the price range I come up with, and the assumption that you the seller will absorb all of the transaction costs, and I even add a little miscellaneous padding. The last thing we would want is to over-estimate how much money you will have after the sale...and then find you don't have enough for your next home purchase.

Once you have figured out approximately how much money you will walk away from the sale of your home with, visit your loan officer armed with this information. You may have other funds (savings, a monetary gift, etc) in addition to the proceeds of your home sale to put toward the next house. Your loan officer will then take this hypothetical amount, run your credit, look at your income and employment, and help you come up with a budget and loan pre-approval for the purchase of the next home.

Next you have two choices: (a) list your home and start shopping for your new home immediately, OR, (b) start shopping immediately. Listing your home and getting it on the market (a) is what I typically suggest -- when you make an offer on a replacement home, that seller will want evidence that your home is at least on the market, if not yet in contract with a buyer already.

Ok, so now you have found the replacement home of your dreams! You write your offer and be sure to check the box in Paragraph 13B. It reads "The attached addendum (C.A.R. Form COP) regarding the contingency for the sale of property owned by Buyer is incorporated into this Agreement. For COP is known as "Contingency for Sale or Purchase of Another Property." Here in this document, which must accompany your purchase offer, you describe the details of your listing, if it is on the market, if it is in contract, when it is expected to close escrow, etc. The buyer and seller negotiate the offer just like any other. Once you have mutual acceptance of price and terms, you start your inspections, get the appraisal ordered and loan underwriting underway...part of the negotiation of this contingency involves whether the seller can cancel your purchase agreement if the seller receives another offer that trumps yours. Generally speaking, the seller can retains the right to continue marketing the property regardless of which option you agree to. 

I'll just point out, that while this scenario is just peachy keen for the buyer making a contingent offer, this is a pretty risky sale for the seller of the home. Often times, the buyer in a contingent offer situation will not have as much negotiation power for either price, repairs, or both. The seller in this scenario does not have any assurance that the sale will go through, AND it often times takes a lot longer than your typical transaction where no contingency of this nature is involved. This opportunity comes at a cost.

Also if the seller receives another offer before the sale of your current home is complete, all hell could break lose. You'll have to remove your contingency early, even if your home hasn't sold -- or walk away from the transaction with nothing. If that seller gets another offer, the seller must give you 72 hours to remove your contingency. This does not mean you need to close your other home asap, but your agreement would no longer be contingent on the sale -- so if something fell through with your sale, you might be stuck between a rock and a hard place. Removing your contingency means you would need to find the funds to close elsewhere such as by obtaining a bridge loan or liquidating other assets if your house didn't sell.

If the seller doesn't receive another offer, then once your current home has sold, you can send your downpayment and closing funds to that escrow, and if your loan officer and Realtor are on top of things, you should be queued up to close escrow on your replacement home concurrently or within a couple days of the sale of your other home. You may need to arrange to rent-back your current home for a week or so just to move out.

Contingent sale/purchases can be great if all falls into place easily and smoothly...but it can also be a huge risk and a roller coaster for a seller/buyer involved in one of these transactions. I don't suggest these for folks who are risk averse or looking for a screaming deal on your next purchase. These require good timing, a little luck, a skilled agent and loan officer, and high tolerance of dealing with lots of unknown timelines and variables.

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