Home Finance 101: The Case for Buying Non-Contingent vs. Contingent (if you can)

Avoiding the “Contingency Premium”

“We may be small, but we’re slow.”

–Cal Tech football team slogan.

If you were a home seller, how much extra would you want in order to assume the risk that the Buyer of your home could successfully sell their current home in order to be able to buy yours?

An extra 5%?

Maybe 10%?

Seller Motivation, Flexibility

The premium certainly varies by Seller and their circumstances:  “How long has the home been on the market?” “What kind of condition is it in?” “How much Buyer interest is there at the current price?” “Do they have a firm timetable for selling, or can they be flexible?”

The premium also varies on the contingent Buyer — most significantly, on the market-readiness and saleability of what Realtors call “the backup house.”

At one extreme is the backup house that’s:  a) well-prepped and well-priced; and b) imminently about to go on the market — or already is.

At the other extreme is a backup house that’s . . . neither.

Of course, there’s always the potential for a further, complicating wrinkle: what if the Buyer’s Buyer first has to sell their house?? (that is, they’re a Contingent Buyer as well).

Contingent Offer as Non-Starter

For all those reasons, home Sellers understandably shy away from a Contingent offer.

Which is Reason #1 prospective Buyers don’t make them: the Seller simply won’t consider one.

Based on my (17+ years) experience, I’d estimate that that’s true of something like 80% – 90% of all Sellers.

Which leaves Reason #2 Buyers who can avoid buying Contingent, should do so:  the small minority of Sellers who will consider a Contingent offer usually require an offsetting inducement.

Surprise, surprise, that inducement is typically price.

Case Study

The way this works out in practice is that someone who wants to buy a home languishing on the market at $500k, from a Seller who’s amenable to a Contingent offer, would likely have to offer full price (or close).

By contrast, assume a non-contingent Buyer could negotiate a deal at $475k.

How does that $25k discount compare to the non-contingent Buyer’s cost to temporarily own two homes?

Given that the Buyer of a $500k home is most likely moving up from a home worth around $300k, you’d guess that their monthly PITI (Principal, Interest, Taxes, and Insurance) is approximately $2,500 a month.

If they buy the $500k home non-contingent first, then take 4 months to sell their $300k — a very conservative assumption in a continuing Seller’s market, particularly at lower price points — their additional holding costs come to $10k.

By my math, $10k is less than $25k, even if there’s more stress that way (sorry, Buyers) . . .

See also, “Compensating for a Buyer Contingency“; “Daisy Chains, Dominoes, & Contingent Offers“; “Contingent Offers:  Getting (Very) Comfortable With the ‘Back-Up Home“; and “Lake Wobegon and Contingent Offers.”

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