We can’t get an offer accepted because of contingency to sell our home, what can we do?

Question of the week:  We can’t get an offer accepted because of contingency to sell our home, what can we do?

Answer:  This question was the result of a newsletter sent by Central Coast real estate Cathy F (if you need a Central Coast agent, let me know and I’ll pass along contact information).

Cathy was writing about conversation with a couple looking to purchase a new home in her region, and they raised the point that they have to sell their home to buy and asked, “will sellers take a contingency?”

For those unfamiliar with lingo and terms, a sale contingency is one thing must happen for the next thing to happen. In this instance, the buyers wanted a seller to accept their offer to purchase the home in which the offer is contingent on the buyers’ home being sold and closing.

Consider, you are in a hot sellers’ market. You see a home you really like that is listed for sale at $750,000. You own your current home and need the funds from your current home in order to purchase the home. You write an offer with a contingency on your home selling and closing.

The seller has several other offers without contingencies. What are the chances your offer will be considered? Most like no chance at all.

So, if you are in such a position what are some options you can take to better ensure your offer will be accepted when you find a home you like?

First, contact a mortgage professional (reply to this email!) and determine if you really need to sell your home to qualify to purchase the new home.

Because rates are so low, you might find you qualify for the new home while also having your current housing payment being counted as an obligation.

But even if we qualify, we need money for down payment.

How much money do you actually need to purchase the home? Many people are under the impression they must purchase with 20% down payment. However, in going through the options of whether you can purchase without having the contingency for your home selling let’s look at other options for funds to close. As part of the strategy, when you do sell your home you can divert proceeds from the sale to payoff, or paydown, any of these scenarios:

  • Borrow from your 401(k) or retirement account that you pay back when you sell your home
  • Purchase with a “piggy-back” transaction in which you have a Home Equity Line of Credit (HELOC) that you payoff when you sell your home
  • Get a HELOC on your current home that pays off when you sell your home
  • Get a bridge loan on your current home that pays off when you sell your home

Consider possible sources of short-term funds you can obtain that will be able to be returned to their source when your current home sells.

We have ability to put the funds together for the new purchase, but we don’t qualify because of our current house payment.

  • Don’t sell you home. Lease it for a year.
  • The rental income will off-set the house payment, which may enable you to qualify for the new home
  • After you have converted the property to investment you have three years from the date you convert it to sell and avoid investment capital gains taxes (consult a tax professional as some taxes may apply)
  • When purchasing the new home consider a piggy-back HELOC that you pay off when you do sell your home to lower the housing obligation, or
  • When you do sell in the future you may wish to paydown your mortgage balance and “recast” the payment for the lower amount owed   

Finally, sell your home before you go looking for a home, but sell it with a contingency that you must find your new home and be in escrow before closing, or with a rent-back until you do.

Huh?

You want to purchase a new home for $750,000 but do not want to, or cannot for qualifying reasons, wish to retain your current home.

You put your home on the market and I write an offer to purchase it for $575,000. You accept the price, but provide me with a counter-offer that the sale is contingent upon your purchasing your next home. If you are not able to purchase a new home the sale is off.

At first, I am happy because I was able to have an offer accepted in this sellers’ market. But then I think, “what if they don’t buy something? I’m out of the market and may miss this price point and interest rate market?”

We end up agreeing that either you identify and are in escrow on a new home in 30 days to close within another 30 days, or we close our purchase in 45 days and you agree to rent back the property from me for my costs on a pro-rated basis for principal and interest on the loan, property taxes and homeowners’ insurance for no more than 60 days (maximum amount allowed by lenders for a rent-back).  This protects me as a buyer, and frees you up to be a buyer with no contingency if required to purchase a home.

Huh?

We agree to our deal and open escrow on May 1st. For the first contingency you have until May 31st to open escrow on a new home. If you do our close of escrow date can be June 30th. If you are not able to enter escrow during this time frame, we close escrow on June 15th (45 days from when we started). You then can rent back the home until August 15th, giving you 60 days to locate and close on your new home—which you can do with no contingency on the sale of your home as you have already sold it.

But what if we do this and we are not able to find a home and have our offer accepted within the time frame?

That is the risk. Essentially, with the parameters you had 105 days to locate, come to an agreement to purchase, and close your new home. If you have not been able to do so then you must vacate the home and rent housing until you are able to purchase. You take the risk to give you some options for your new purchase, including removing the contingency that you sell your home.

This last strategy is one we saw employed by sellers quite often in the late ’80’s and early 90’s but not so much since. When you own property in a sellers’ market but are becoming a buyer, take advantage of the friendly terms available to you as a seller to better position yourself as a buyer.

We often speak with homeowners who want to purchase a new home but enter the conversation with the mentality that because they are current owners, they won’t be able to get an offer accepted. Too often this is because the real estate agent(s) they have spoken have told them this is the case. However, after we speak and go through all the possible options they find some that they are comfortable with and we are able to move forward, which means they purchase a new home.

Do not let conventional thinking, or narrow thinking, inhibit your ability to purchase a new home. Explore all options that may be available. Some may not be ones you are comfortable with, others may not work for you, but until you work through all the possible combinations you will not know if you can achieve your desire for a new home in the current market while owning a home as well.

Call me to discuss your options.

Real estate agents with clients who are in this position, have them call me to discuss their options and help put together a plan that works for everyone.

One final note. Several of buyers we have worked with in the past year have been successful because their real estate agents have contacted their clients who own investment homes and worked out one-time showing and sales. Other agents with buyers having a challenge getting an offer accepted have contacted rental property owners in the area their buyers wish to purchase to discuss a one-time showing and sale. The property owners have the benefit of getting market price for their property without putting it on the market and disturbing their tenants. The buyers benefit from not having to compete with several other offers. The agent’s benefit is obvious—a sale and commission. For those agents pursuing this route please read the WR&MU from January 29th, “Should we exchange our investment property or sell it and pay the taxes?”

Have a question? Ask me!

MAJOR CHANGE FOR INVESTMENT PROPERTIES AND 2ND HOMES: Earlier this week an announcement was made that Fannie Mae must limit its holdings of mortgages secured by 2nd homes and investment properties to 7% of total volume. This means that rates for these mortgages are going up significantly. Today most lenders are coming out with pricing changes that are as high as 3-5 points more than they were yesterday. This move will push buyers, and owners looking to refinance, to alternative lending sources and higher rates.

Here is link to Fannie Mae announcement.

Rates for Friday March 12, 2021:  Rates continue to see-saw through the week as investors navigate between supply of fixed-income assets (bonds, mortgages), expectations for future economic growth and inflation, and security of returns. Rates are flat this Friday from last, however there is more upward pressure than downward pressure, or no pressure on rates.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                         2.875% Flat

30 year high-balance conforming                   3.00%  Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

One year ago Sunday, it was Saturday March 14, 2020, was the seminal moment for me and the Covid-19 pandemic. Our daughter was flying home from France where he semester abroad had been cancelled. As well, our good friends Matt and Loara got married. Leslie, missed the wedding as she volunteered to pick our daughter up at LAX.

The wedding was at an event location in Long Beach that had plenty of room inside and out for the 60-70 people in attendance. We all knew that the coronavirus was a “thing” but, like most people did not know the extent it would spread and impact everyone’s lives. It was a beautiful evening, more so because we all knew it was likely the last time for a while we might be able to enjoy getting together. There were handshakes, hugs, laughter and plenty of love to go around.

At the time we thought, as did most, that we would probably been unable to gather with others for a few weeks, maybe a month or two….

Here we are 363 days later and yearning for the ability to hug friends, shake strangers’ hands, gather with others to lift a glass in toast and laughter. We are getting there, with patience and anticipation. Keep the course and when we can let’s have that handshake, hug, lifting of a glass.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog