Negotiating + Financing

With the real estate market (somewhat) slowing down, buyers and sellers eye contingencies

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The condo had been on the market for about four-and-a-half months when buyers came in with a strong offer; they were interested in the apartment, but there was a hiccup: They first had to unload their house in Westchester near Riverdale. Paul Zweben of Douglas Elliman was representing the sellers, who found the offer intriguing, so they moved ahead–carefully.

Zweben performed due diligence, including making sure the potential buyers' house was priced correctly. (The Westchester agent sent him photos of the property so he could check it out.) The broker also forwarded Zweben's sellers a letter from the interested parties professing their enthusiasm for the apartment. “They fell in love with the buyers after they got [the] heartfelt letter,” he says.

So a deal was hatched, albeit with conditions: The buyers would rent the apartment for a while until they sold their house, but after six months, if they failed to do so, they could continue renting it but at a higher cost, and the sellers could start marketing it again. 

The real estate industry calls this type of exception a contingency, which essentially means a buyer and seller have agreed to a purchase offer, but certain conditions have to be met. Contingent offers haven't been seen much lately, given how hot the market has been—sellers could always find other takers—but some attorneys and agents report that they've been making their way back into the fray, signaling what could be a rebalancing in the market.

"I hadn’t seen more complex deals like this in the last seven years," says Zweben, who's working on another deal similar to the Westchester buyer case. "I wouldn’t say that it’s a buyer’s market yet, but I’d say it’s a shifting a little bit.” 

Attorney Adam Stone has had two similar transactions recently where his clients took on buyers who went into contract that was contingent on the sale of another property. "I was really surprised also at first," he says, adding that "it's so rare that a seller would go along with that." Still, Stone says, "everything is market-driven."

It's more about the money

Ari Harkov of Halstead Property says he has yet to see contingencies similar to Zweben's and Stone's clients. “Never in my 10 years selling real estate have I done a sale-contingent deal," he says. "I’ve seen it asked, no one ever agrees to it." Nonetheless, some buyers are starting to be bolder about asking for what they need to make a deal happen. “In this market, because things are a little softer, and no one knows where the ground is, the pendulum has swung in terms of buyers asking for things," he says. 

In fact, a more straightforward—and common—exception buyers sometimes ask for is what's called a mortgage contingency, defined by the website LegalMatch as a clause in the purchase contract "stating that if the buyer cannot secure a mortgage loan within a stated time frame, either party is free to cancel the entire sales transaction." Other, more usual, contingencies include having to wait for a board approval, or a property appraisal.

Ace Watanasuparp, regional manager of Citizens Bank, says though it's not rampant, he has seen a notable—if not definitive—increase in the number of mortgage contingencies landing on his desk.

"As a mortgage bank, we are seeing more clients saying they are getting mortgage contingencies and they need to be approved within 60 days for getting a commitment or else the deal is off or [a buyer has to] come up with the difference," he says. (For example, if applicants need to borrow $1 million, but are only approved for $900,000, they'd have to come up with $100,000 to bridge the gap.) "Last year, if someone came into a new development or a resale and asked for a mortgage contingency, I would say 9 out of 10 times, sellers would probably say, 'No.' Or all-cash offers or nothing. Now sellers are more open."

"Buyers are getting a little hesitant right now. The banks are kind of locked up. We’re seeing a lot of contingencies. Every first-time purchaser is putting out contingencies right now. The past two or three years when people asked we kind of laughed, but now we’re proposing them to the owners," reports Glenn Davis of Elliman. "It’s definitely happening. We’re still kicking back and saying no as sellers, but I’m sure contingencies are going to come back in full effect until the market evens out."

Not all price points—and not all situations

While it's not unheard of to have buyers of all stripes requesting contingencies, the more down-to-earth end of the market is seeing fewer of them, say our sources. “In this market terrain, buyers are able to ask for contingencies, depending on the area [and] especially if it’s a really expensive apartment—they’re moving much slower," explains John Gasdaska of the Corcoran Group, who says that the lower end of the market still remains hectic—and therefore relatively lacking in sellers willing to accept complications. 

"As market dynamics change and as the market softens in the $3-million-and-plus range, [there are] sellers who are willing to entertain contingent offers," says real estate lawyer Jerry Feeney, who says he has seen them more in Westchester County and Rockland County than in the city, and mainly in the last six months. 

(Interestingly, Davis reports encountering them for lower-end properties, too, so clearly the situation's developing: "The majority of contingencies I have seen have been on purchases under $2 million. We have seen five offers with contingencies on listings we have had in the past six months," he says. "Two of our purchasers have also asked for contingencies on their purchases and they were accepted. Both under $1.5 million." Robbie Gendels of National Cooperative Bank—which, full disclosure, is a Brick sponsor—says her firm hasn't run into mortgage consistencies at all lately.)

Contingencies are more likely to be accepted, of course, if there aren't any better offers. "This isn't prevalent at all, just certain apartments that, for whatever reason, aren't selling," says attorney Bruce Cohen. Very occasionally, he says he has seen short, one- or two-week contingencies for buyers who haven't gotten the commitment from the bank yet, "but they're close." 

Sellers who want to hold the line on a certain asking price may be more willing to accept contingencies, but there are other motivations informing the decision to accept or reject a contingent offer. "It depends on what you, as a seller, need to do," says Stone, who has handled two of these types of deals in the last three months after going several years where there haven't been any. "If you've been on the market and you haven't gotten any good offers and this is what it takes, then people would be more likely to agree."

If sellers want a quick sale—for instance, if they have to move out of the country and have little time to wait, or simply want a done deal but don't want to part with their home at bargain-basement prices—a contingent offer may be the way to go.

The art of making a contingent offer

How a contingent offer is set up is important, sources say. Feeney has had clients agree to offers that hinge on their buyers being able to close on their own properties, but only if their sale looks to be a done deal—for example, if the ones buying their property are awaiting board approval and there's no reason to worry that they won't pass muster and can't close.

Even then, he adds, there are strong caveats. "If someone came to me now and they were a buyer and they needed to wait on their current apartment to close and it's not even on the market yet, it'll be pretty hard to find a seller who'd be willing to [move forward]," Feeney explains. "You can't expect the seller to take [the property] off the market and hang around waiting for you for 60 days and then be potentially left holding the bag."

One solution? A reasonable monetary compensation, say a promise to cover what's called the carrying costs of a property—maintenance and utilities, for instance—for each month the seller has to wait for the buyer to make good on the sale. (The agreed-upon compensation doesn't have to be tied to carrying costs, of course, but it's a good place to start.)

"If the buyer is strong, and their contingency is specific to an appraisal or an amount, then the seller's risk can be mitigated and they can probably move forward (obviously after agreeing on all the other basic terms)," says Chad Thomas of Mirador Real Estate

Stone also recommends adding a "drop-dead date" in the language of the contract for the transaction to close, or else the deal is off. "For a seller, you don't want to have this drag on forever," he says.

From the buyers' perspective, Thomas suggests those who are risk-averse and want mortgage consistencies to offer to forfeit a portion of the contract deposit—as opposed to the entire amount—"if it's a highly desirable property or a competitive buying environment." This way, there's some skin in the game, so to speak. "It's a way of showing the seller that they're willing to do everything possible to close," explains Thomas.

Still, though experts say they're worth considering, they also suggest proceeding cautiously, or avoiding them altogether if they're too troublesome to put together or the situation just seems too chancy. 

"Purely from a legal standpoint, you have a contingency for things completely out of your control. If I'm a seller and it's contingent on another transaction I have nothing to do with, I have no idea what's going on in that transaction. Maybe my buyer is being unreasonable in the terms he's demanding on the sale of the apartment. Maybe they're asking too much in price or in other terms," says Stone, who's not a fan of them and makes sure to explain the ramifications of what could happen and what could go wrong with them to his clients. "For me, personally, I'd rather have a deal without contingencies and take a little bit of a lower price, but not everyone thinks that way." 


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