Why Contingent Offers Aren't Market Value

By
Real Estate Broker/Owner with J. Philip Faranda (J. Philip R.E. LLC) Westchester County NY

Is a contingent offer at market value? 

Stones in Pound Ridge NY

I have the same conversation over and over as I meet people in the same situation. Case in point: Today I interviewed a very nice couple in a small town just north of Westchester County who expired with their broker last month. I won't bore you with the details, but it was brought up that they *may* have a buyer for their home. However, the would-be buyers have to sell their own home first. This is not an unfamiliar scenario. 

In many cases, people who have a contingent (as in, they have to sell their own house first) buyer have even gone so far as to discuss-and agree to- a purchase price. When they interview an agent to list their home in case their contingent prospect can't perform, they sometimes can't reconcile the recommended list price from the agent with the (higher) price of their contingent prospect with the house to sell. They don't understand that their prospect with the contingency is not really offering them market value

Market value is what the ready, willing and able buying public will pay you for your home. Someone with a house to sell isn't able. As such, there are two hazards a seller faces when hanging their hat on that contingent offer. 

The Math Hazard. Buyers who still have a house to sell often have an inflated opinion of their own value. Sure, they'll give you every dime of the asking price after they cash out $100,000 from the sale of their home. However, life happens. What if they can only get $50,000 out of their home? They'll have to lower their offer on the house. They can't afford more with reduced proceeds.

The Moral Hazard. 7 months later, after 2 deals die and 3 price reductions, the formerly cheerful and enthusiastic buyers with the house to sell stagger back to the negotiation table embittered and jaded. They have been through hell and had a huge chunk ripped out of their hide. And by gum, they are going to do the very same thing when they get their purchase done. Buyer's market, huh? Well, now they are buyers and they are out for blood. How much do you want? Fat chance fella. You'll take less from me. 

The folks I spoke with today didn't need much convincing- they were far to mature and understood human nature. But some sellers, subjective as they are, need to know this. Contingent offers are seldom indicative of the true market conditions because the other would be principal has not gone through their own process.  

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Re-Blogged 2 times:

Re-Blogged By Re-Blogged At
  1. Joe Jackson 12/02/2011 08:05 AM
  2. Cheryl Ritchie 12/03/2011 06:23 PM
Topic:
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Show All Comments
Rainmaker
194,919
R.E. Renée Hoover, Salesperson
Century 21 Geba Realty, Milford, PA - Milford, PA
Poconos, Pike, Wayne, Monroe Counties, PA

Thanks Phil for the very valid points and insight. Posts 16 and 23 above are good too!

December 01, 2011 09:45 PM #32
Rainer
171,630
Luis Iniguez
Option One Real Estate - Fontana, CA
Search Inland Empire Homes For Sale - Short Sale Agent

Great post JP.  You hit the spot with this one.

December 01, 2011 10:49 PM #33
Rainmaker
334,613
John Juarez
Prudential California Realty - Fremont, CA
CDPE, ePRO, SRES, GRI, PMN

J. Phillip,

The house will still need to pass the appraisal test. The appraiser does not care that the inflated price was one tendered on a contingent purchase. The appraisal will still reflect market value. Sellers who are thrilled with the price offered on the house by contingent buyers need to take a good look at the comps and make an educated guess, with the help of their agent, about whether the price will pass the appraisal test.

December 01, 2011 10:49 PM #34
Ambassador
1,554,090
Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 800-610-7253 DRE01267479 - Costa M

J. Philip - This is a very valid point and the reason many sellers won't accept contingent offers.

December 01, 2011 11:10 PM #35
Rainmaker
375,420
Kerry Lucasse
eXp Realty - Nest Atlanta Team - Atlanta, GA
Your Nest Atlanta Real Estate Consultant
I just had a similar discussion with my sellers today! Not only would they pay more for their new home, they will probably sell their current one for less.
December 02, 2011 12:16 AM #36
Rainer
177,469
Rosalie Evans
Meritus Group Real Estate - Sioux Falls, SD
The Evans Group, Sioux Falls, SD Homes For Sale

I know if I was selling right now I would not even consider a offer contingent on and for all of the reasons you specified! I especially concur about the buyers being out for blood after having a rough him on their own sale! I have seen that one time and again! 

December 02, 2011 12:41 AM #37
Ambassador
1,091,473
Joni Staples
Berkshire Hathaway Home Services - Anderson Properties - Huntsville, TX
Your Huntsville / Lake Livingston Area REALTOR®

Philip: This was just BEAUTIFULLY said! You couldnt have made it any clearer. All I can say is AMEN!

December 02, 2011 01:03 AM #38
Rainmaker
496,208
Jordon Wheeler
The Jordon Wheeler Group - Fairburn, GA
J W Group Real Estate Sales and Service

J Phil, excellent post and great advice for sellers.  I don't bother with the contingent offers and you stated the reasons why.  Thanks and much success to you sir!

December 02, 2011 05:28 AM #39
Rainer
145,762
Michael S. Bolton
Michael S. Bolton,Inc. - Zimmerman, MN
MN Appraiser

Phil, Well said, and great explanation of Market Value. Most people never get the "able" part. There are times though when someone buying on a contingency is able to own two houses, but would rather wait until one sells, however, that's rare. Great post!

 

December 02, 2011 06:03 AM #40
Rainmaker
284,664
Charlie Dresen
Steamboat Sotheby's International Realty - Steamboat Springs, CO
Steamboat Springs, CO e-Pro

Excellent post which contained many good points. While some sellers "get it" (like your latest clients did), others just don't want to hear that the true market value of their home is lower (sometimes way lower) than some price they've "negotiated" with a potential buyer after x, y & z falls into place in their lives.

December 02, 2011 07:16 AM #41
Rainmaker
161,368
Dylan Taft
Dylan Taft Broker/Owner Taft Street Realty, Inc. - Woodstock, NY
Ulster County Area Consultant

Couldn't agree more.  Buyers who have recently sold are definitely out for blood!  They had a buyer beat them up so now it is time to stick to some other undeserving seller! 

December 02, 2011 08:10 AM #42
Rainer
195,845
Jesse Skolkin
Independent New York State Certified Real Estate Appraiser - Fresh Meadows, NY

J. Philip:

Many people confuse the meanings of price and value.

Price represents a transaction.

Value is an opinion.

December 02, 2011 08:27 AM #43
Rainmaker
138,153
Mike Woods
msWoods Real Estate, LLC - Indianapolis, IN

Good advice on how to handle a common seller objection in today's market. Thanks for sharing

December 02, 2011 09:45 AM #44
Rainmaker
892,444
Michael Setunsky
Michael's Commercial LLC - Woodbridge, VA
Your Commercial Real Estate Link to Northern VA

Phil, contingent on the sale of the buyers home depends on the market. We usually make sure there is a kick-out clause in the offer.

December 02, 2011 10:01 AM #45
Rainmaker
199,880
Kimberley Kelly, SFR, HAFA
HK Lane, Christie's International Affiliate, 760-285-3578 - La Quinta, CA
I do Real Estate like I played polo-to WIN!

COP offers must have reality behind them.  I don't take many of them.  They must have an executed contract in on their property, comps to support salels price and always a 72 hour opt out clause for my Sellers.  Thanks.

December 02, 2011 10:36 AM #46
Rainer
38,026
Erika Madsen
Fathom Realty - Gilbert, AZ
Fathom Realty - Southeast Valley District Director

So seriously TRUE... have a great weekend!

December 02, 2011 11:20 AM #47
Rainer
157,536
Anthony Daniels
Coldwell Banker - San Francisco, CA
SF Bay Area REO Specialist

Buyers set the market in my book.

Good post for future reference.

Thanks for sharing it.

December 02, 2011 01:34 PM #48
Rainer
143,700
Victor Zuniga
Berkshire Hathaway Home Services California Properties - San Diego, CA

Having to enter a transaction where the buyer has to sell their home in order to make the purchase go through is always more challenging and the risk of things falling apart is so much higher. Then again it sounds like in this situation the buyer had to sell their home to a buyer who also had to sell their home. Yikes!

December 02, 2011 03:14 PM #49
Rainmaker
1,159,308
Cheryl Ritchie
RE/MAX Leading Edge www.GoldenResults.com - Huntingtown, MD
Southern Maryland 301-980-7566

What an outstanding way to explain this! A contingent offer is not market value because this Purchaser has not been run through the mill...i.e. process yet. They are not ready, willing and able. Until they are, the price they are willing to pay is not the real end of the line deal.

Reblogged!

December 03, 2011 06:24 PM #50
Rainer
43,085
Valerie Duncan Stewart
(Metro First Realty) - Oklahoma City, OK
Real Estate Agent-Broker, OKC, OK

The DREADED CONTIGENCY....SO NOT a fan of these offers. Hard to explain to a seller the likelihood of the offer falling apart and wasted time. It's a tough market and some sellers feel they need to jump on the offer since so few are coming their way or they become impatient.

Another aspect to the DREADED CONTINGENCY is a buyers' aversion to looking at "contingent" properties.  If a buyer feels it won't be an easily negotiated deal, they avoid it like the plague. Unless of course, the house is priced like a shack and looks like the Taj Mahal. 

December 04, 2011 09:34 AM #51
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J. Philip Faranda

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