In light of the overwhelming election results, and while we wait for QE2, I thought today rather than interpret, analyze and hypothesize about what will happen next, I’d instead talk about selling houses.
A buyer of mine purchases a home subject to selling their current home. This is called a contingent sale – one sale is contingent upon the sale of another. Years ago this was a pretty common practice. But it’s generally a method used in a down market. When the market was strong, no one believed someone else’s home would sell faster than their own; so contingent sales became far and few between. However in today’s market, we find the contingent sale is once again an attractive option. This is especially true when the replacement property or second leg in the chain, is a larger, more expensive home, or perhaps one which for some reason, has been languishing on the market, as was the case for my client.
We found a home that had been on the market for more than 180 days, made an offer, negotiated and opened escrow. We reduced the price of our home and at the midnight hour – literally the 30th day of a 30 day contingency – received and accepted an offer. We naturally had to take less than we wanted, but time was running out, and my clients really wanted the home they had purchased. Now here’s where it gets interesting. We had purchased originally agreeing to a 45 day closing. Yet here we were, 30 days in and we have only now sold our home. We had done an inspection right away, and my client had provided their lender with all the appropriate paperwork, but that was pretty much it. After all, we hadn’t sold, and despite early price reductions, had no buyer on the horizon. During a standard sale in California, a purchaser has 17 days with which to conduct investigations, inspections, get an appraisal and obtain their final loan approval. At the end of the 17 days, the buyer is supposed to sign off and put their “money on the table”. It’s a contract clearly favoring the buyer since the seller has to take their home of the market for those 17 days and the buyer can cancel should they find something during their investigations they disapprove of or if they can’t qualify for a loan. Since we were buying with a home sale contingency for 30 days, we let the 17 days pass without completing the process. The seller subsequently sends a notice to perform, demanding my client sign off on their contingencies – a request that went unheeded. This response afforded the seller the opportunity to cancel the transaction should they so choose, something the buyer felt entirely reasonable. The seller elected to let sleeping dogs lie, even though they were frustrated with our lack of response. Suddenly however, we’ve sold and now we need to extend the original closing date so that the two escrows in the chain can close concurrently – my client gets his money from the sale of his home and subsequently uses that to purchase his new home. Terrific, it takes a little longer but everyone wins, only the seller of home #1 decides he will grant the extension but only if my client compensates him for the costs of the extension. Those costs being his mortgage taxes and insurance the difference between the original agreed to escrow period and the new closing date that’s tied to the sale of the second leg of the transaction.
The original contract did not spell out that the contingency of selling home #2 would, by definition, automatically push back the closing of home #1 to coincide with the closing of home #2. Thus a predicament is born. Of course logic would suggest this is obvious and further that in this challenging market place a seller would gladly push back to close to accommodate their now incredibly valuable real buyer. However, logic is not a replacement for a clearly spelled out contract. Unfortunately, in this story and for reasons difficult to understand, the seller of home #1 is prepared to cancel the transaction if they do not receive their compensation for the extension. Clearly one would hope the seller’s Realtor would step in and talk their seller “off the cliff”. Naturally they would explain the obvious: that going back on the market in no way is a benefit to the seller and that the carrying costs of extending are the same as not being in escrow and searching for a new buyer. In fact as we can easily surmise in this example, given the market we’re in, the costs of canceling will likely eclipse those of extending. Alas, this is not what is happening. To the contrary, the seller’s Realtor, in an effort to “represent the seller” is accommodating the seller’s irrational behavior which includes playing attorney and composing amendments to the standard contract. When driving, this is called “playing Chicken”; in poker it’s called bluffing; in real estate, it’s called suicide. Can this deal be saved? Stay tuned and come back next week, for another new episode of, Realtor Wars… Ugh.