Here’s what agents need to know to handle purchase transactions contingent upon the buyer’s sale of other property.
Agents representing buyers who sell
Real estate agents occasionally find themselves representing a homeowner who is both selling their home and buying a replacement home. The simultaneous seller/buyer and their agent commonly structure both transactions as contingent transactions rather than entirely separate standalone transactions.
When a buyer of a home agrees to purchase a home on the condition of the sale of their existing home, called a contingent sale, the buyer (referred to in this article as the “contingent buyer”) goes under contract to purchase a replacement home before closing a sales escrow on their old one. The purchase agreement for the replacement home includes a contingency provision specifying action the contingent buyer needs to complete — the sale of the old home — before escrow for the replacement home may close. [See RPI Form 150 §10.4]
Typically, a contingent buyer and their agent enter into a contingent sale because the buyer needs funds from the sale of their old home to pay part or all of the price for the purchase of the replacement home. Although alternative financing options exist, such as bridge loans secured by the old home, they rarely appear due to modern buyers’ lack of purchasing power or positive equity.
Agents representing contingent buyers effectively negotiate two transactions at once, a sell-and-buy situation demanding extra finesse and thorough due diligence.
Content of the contingency provision
A contingency provision included in a purchase agreement specifies the conditions — events or activities — to be completed prior to or concurrent with closing the purchase transaction. When these events or activities occur or are completed, the contingency has been satisfied. If the contingency is not satisfied, the person benefiting from the contingency may cancel the transaction. These contingency provisions may be included in the body of the purchase agreement or in an addendum to the purchase agreement. [See RPI Form 150 and 150-3]
In the case of a contingent buyer whose purchase escrow is on hold until their sale escrow on the old home is closed, this contingency provision is a condition precedent. A condition precedent requires a condition to be satisfied before a dependent action — the closing of the escrow on the replacement property — can be performed. [Calif. Civil Code §1436]
The contingency provision requiring the sale of the contingent buyer’s property prior to the close of the purchase escrow needs to specify:
- the details of the event which needs to occur, in this case the sale of the contingent buyer’s property;
- the date and time by which the event needs to occur;
- whether the contingent buyer, seller or both may cancel the transaction when the contingency is not satisfied; and
- how any Notice of Cancellation Due to Contingency is to be delivered, if necessary. [See RPI Form 183]
Once the terms of the contingency provision are established, the contingent buyer and their agent need to diligently work to satisfy the contingency. On elimination of the contingency by its satisfaction, the agent proceeds to close the purchase escrow.
Agency duties in a contingent sale
A contingent sale requires extra attention by all agents involved, for each of three different principals involved in the transaction.
The contingent buyer’s agent (who is also the seller’s agent in the sale of the old home) needs to ensure the sale of the old property goes off without a hitch to facilitate the purchase of the replacement property.
As the facilitator between both transactions, the contingent buyer’s agent — acting as the seller’s agent of the contingent buyer’s old home — needs to request more frequent updates than usual on the progress of activity in the separate but connected transactions, such as the status of the lender’s appraisal report for the sale of the old home. The buyer’s agent also needs to immediately communicate these status updates to the contingent buyer and the seller’s agent of the replacement home.
The seller’s agent of the replacement home also needs to closely monitor the sale of the contingent buyer’s old home, since the closing of the sale on their seller’s home is contingent on closing escrow for the sale of the contingent buyer’s old home. The seller’s agent needs to ensure the contingent buyer’s old home is listed at an appropriate price, is in suitable condition to attract a buyer and is being properly marketed when it has not yet sold.
Contingent sales come with inherent risks, most of which are manageable. However, despite an agent’s best efforts, contingent sales sometimes lead to significant delays.
Problematic concurrent closings in contingent sales
The wild card often involved in contingent sales is possession, affected by the presence of an additional, although indirect, party to the contingent transaction. This third party is typically the buyer of the old home or the mortgage lender funding the purchase price of the replacement home, or both.
Although the contingent buyer’s agent acting as the seller’s agent for the contingent buyer’s old home has a large role in efficiently closing its sale, they are not in control of the buyer of the old home. When, for whatever reason, the closing of escrow for the old home is delayed, the delay affects the contingent buyer’s purchase of their replacement home and thus the seller’s sale — preventing all three buyers and sellers from moving.
The actions of the lender providing mortgage financing for the contingent buyer’s purchase transaction often delay its closing as well. Typically, the contingent buyer needs to wait for their old home to sell before the lender funding their purchase of the replacement home will approve the mortgage. In this situation, the contingent buyer is stuck in the middle of a triangular stalemate. The buyer of their old home wants possession, but the seller of the replacement home won’t deliver possession until the purchase escrow closes. Thus, the buyer of the old home can’t move in and the seller of the replacement home won’t move out — leaving the contingent buyer of the replacement home stuck in the middle — until their mortgage lender funds the purchase and the purchase escrow is closed. Here, interim occupancy arrangements are often considered. [See RPI Form 272]
Of course, alternatives negotiated in contingent sales can prevent these delays. The contingent buyers can take out a bridge loan secured by their unsold home to fund their transition from one home to another, or simply close the purchase of the replacement home if the replacement mortgage lender is willing and make payments on two mortgages until the old home is sold. However, both these alternatives require the contingent buyer to have a large equity in the old home and strong financial capabilities, making them rare choices for today’s strapped homebuyers.
Buying before selling: advisable in today’s market?
Contingent sales make it possible for buyers relying on what equity they have in their old home to make a down payment on the purchase of a replacement home — but the risks of delays and cancellations plead caution. Whenever possible, buyers need to consider completing the sale of their current home before buying a replacement one, so their cash for funding a down payment and qualifying for mortgage financing are readily available.
However, buyers in today’s hot seller’s market — the result of a housing supply crisis — may not have the opportunity to enter into a purchase agreement contingent on selling their old home. Looking forward, a buyer’s purchasing power is dependent on the level of mortgage rates. Purchasing power is thus primed to fall when interest rates rise again, most likely in 2017, pushing homeowners who want to relocate into alternative transactions like contingent sales.
Thus, when a buyer decides to move forward with a contingent sale despite the agent’s advice about contingency provisions and buying before selling, it is up to the agent to ensure the contingent buyer is able to perform all obligations effectively to complete both transactions — their sale and their purchase.
Need more information on contingency sales? Check out Chapter 42: Contingency Provisions of Real Estate Practice, available through the first tuesday Realtipedia.