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-Bloggged 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
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Topic:
Home Selling
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Tags:
market value
contingent offers

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Rainer
37,901
Erika Madsen
Fathom Realty - Southeast Valley District Director
Fathom Realty

So seriously TRUE... have a great weekend!

December 02, 2011 11:20 AM
Rainer
157,436
Anthony Daniels
SF Bay Area REO Specialist
Coldwell Banker

Buyers set the market in my book.

Good post for future reference.

Thanks for sharing it.

December 02, 2011 01:34 PM
Rainer
143,700
Victor Zuniga
Berkshire Hathaway Home Services California Properties

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
Rainmaker
1,143,213
Cheryl Ritchie
Southern Maryland 301-980-7566
RE/MAX Leading Edge www.GoldenResults.com

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
Rainer
43,085
Valerie Duncan Stewart
Real Estate Agent-Broker, OKC, OK
(Metro First Realty)

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
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Rainmaker
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J. Philip Faranda

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Additional Information

Phil Faranda is broker and owner of J. Philip Real Estate LLC in Briarcliff Manor, NY. Since founding the firm as a sole practitioner in late 2005, the team has grown to over 30 agents & closed 350+ transactions valued at $140 million. He is in his 4th term as Vice President of the HGMLS. This blog commentary is geared toward consumers and industry colleagues alike. You can reach him at (914) 723-8900.
Warning: *Sarcasm and irony advisory at all times.*



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