During the red-hot seller’s market of the past couple of years, we saw contingencies all but disappear in high-demand markets. As the market shifts, the reemergence of contingent transactions and contingency clauses can help you gauge the balance of power.
According to the National Association of Realtors (NAR), in 2022 roughly 20 percent of homebuyers haven’t been including contingencies in their offers. Typically, we know this happens because they are in a seller’s market, and to stand out to the seller and make an offer more attractive, we’ve seen that a buyer will waive all contingencies.
Now, contingency clauses fall into a large range of items, and there is common confusion between a contingent home and a contingency clause. A contingency clause is essentially a clause that says if this, then that.
A great example is loan contingency, which states that if you cannot get a loan, then you have an option to terminate or work through a solution. You’ll see the same concept with an inspection contingency: If the inspection is not to a buyer’s liking, then the buyer has an option to terminate the contract or work with the seller toward an amicable solution.
Contingencies start at the offer point. The buyer offers, typically with a deadline, and then the seller can accept, reject or counter. From there, we have multiple contingencies throughout the contract for both the buyer and seller depending on the state and the contract. For the most part, if a contingency is not met, the contract will automatically terminate, but again, this is state and contract-dependent.
Over the past few years, we’ve seen the market shift heavily in the seller’s direction. The more contingencies the buyer placed in the contract, the weaker the contract. The buyer contingencies are typically outs or negotiation points for the buyer.
So the more certainty, and the fewer contingencies, a buyer can give to the seller, the more likely the seller would move forward with an offer. This is where we would see full appraisal gaps or no appraisal contingencies, or as-is sales with no inspection contingency.
The other piece to discuss is the contingent offer based on a contingent property. This typically is when a buyer has to sell a property to buy the next property.
The buyer’s offer is contingent on them selling their house to buy, which means a domino effect can be created. If the buyer fails to sell, they cannot buy, then the seller cannot sell or buy on the other side and so on.
As the market has started to shift toward a more neutral market, buyers are gaining more power again and are able to use contingencies to better protect themselves in the market. We’ve noted this in Denver over the past couple of months.
During the hottest parts of Denver’s seller’s market, we saw these contingent property offers become virtually non-existent. We started to see disruptors enter the market or larger companies that would assist the buyer in purchasing before they sold their home with bridge loans, cash offers on the contingent property, and numerous other examples to assist a buyer who has to sell and who would not be able to buy with that contingent offer.
That said, we are starting to see the shift where a contingent property offer has come back with the other contingencies. With all the disruptors, typically, there was an additional cost with utilizing one of the buy-before-you-sell programs. We are now seeing that money head back to the seller who is about to become a buyer.
Bottom line: As the market shifts, even in red hot markets like Denver, expect more contingent property offers and contingencies to appear as part of the process. It’s a solid indicator of the conditions in a shifting market.