What Is a Contingency Offer?

The process of buying or selling your home can be tough to navigate especially when people start dropping real estate terms like "short sale" and "contingency offer"; not everyone knows what these phrases mean. Today we'll take a closer look at what a contingency offer is and answer some questions about how to handle such offers.

A lot of people have heard of contingency offers but may not know exactly what they are; can you explain the process of putting this type of offer on a house?

A contingency offer is simply when someone who has their own home on the market finds another home they would like to buy and the offer they put on the home is dependent upon the sale of their own home; they put a "contingent offer" on that home. The presumption is that this is the right way to go, but in my personal opinion it is not.

As a real estate professional it is my opinion that no matter what side of the offer you are on, buyer or seller, a contingency offer is not a good idea. Let me explain.

Imagine for a moment that you're a buyer and you find a house that you would like to put an offer on, but you want to make that offer contingent on you selling your current home. Let me explain why I think this is a bad idea.

As a buyer who has a home to sell, you are not a "real" buyer as far as the seller is conce
ed; you're a "wannabe" buyer. And as a seller, are you going to negotiate your lowest deal with a wannabe buyer or a real buyer?

Putting a contingent offer on a home is essentially the same as asking the seller to put all the buyer's eggs in their basket as well and as a result, the seller will not come down to their lowest amount. What I see happen, is somebody gets emotionally attached to a house and they end up paying more than what they really should in that situation because they are not a "for sure" buyer who can have a definite closing date.

How do you suggest a buyer handle a situation where they want to buy a home when they still have a current home to sell?

What I recommend is that they get their home on the market and start marketing it like crazy so they can begin to get feedback on their property. Then once they start seeing that they are in the top 3 of the buyers' selections - you want to at least be the bridesmaid, because if you're not the bridesmaid you're not going to be the bride - so you want to make sure you're ranking at the top of the showings. So once that starts happening, then you want to go out and start viewing homes.

What I try to share with people is that they're going to go out and "date" but they should not fall in love with anything. You need to understand what's available in the marketplace, but you should not get our heart involved. So what you want to do is find 3 or 4 homes that you like and that you can imagine yourself living in.

What about the other side, as a seller, why is it a bad idea to accept a contingency offer?

As a seller, the problem with a contingency offer is that once you've accepted the offer your home will be highlighted when it's pulled up on the MLS. A home with a contingent offer of any kind - whether it's contingent on financing, or inspection, or the sale of another home - is highlighted in yellow.

And in today's market we already have too many homes to pick from so what are we doing? We're looking for reasons to narrow that margin down. So every home that's highlighted in yellow, we're going to eliminate those right away. We're not going to consider the fact that it is contingent upon the sale of another home which would more or less mean it's still available.

As a seller, if you receive a contingency offer from a perspective buyer, how do you handle that offer?

My recommendation is simply to share with them that you really appreciate their interest in the property right now, but that they need to go back and focus on selling their home, and then you'll try to negotiate the best deal you can once they are ready to buy. You want to show your appreciation, but you don't want to get involved in that situation.