During the fiery seller’s market of the past two years, we have seen contingencies virtually disappear in high-demand markets. As the market evolves, the reappearance of contingent transactions and emergency clauses can help you assess the balance of power.
According to National Association of Realtors (NAR), in 2022, about 20% of homebuyers did not include contingencies in their offers. Typically, we know this happens because they are in a seller’s market, and to stand out from the seller and make an offer more attractive, we have seen that a buyer will waive all eventualities.
Now, emergency clauses fall under a wide range of articles, and there is a common confusion between a contingent house and an emergency clause. An emergency clause is basically a clause that says if this, then that.
A good example is the loan contingency, which states that if you can’t get a loan, you have the option to terminate or find a solution. You will see the same concept with an inspection contingency: if the inspection is not to the buyer’s liking, the buyer has the option of either terminating the contract or working with the seller to find a solution to the friendly.
Contingencies begin at the point of offer. The buyer proposes, usually with a delay, then the seller can accept, reject or counter. From there, we have multiple contingencies throughout the contract for both buyer and seller depending on the state and the contract. In most cases, if a contingency is not met, the contract will automatically terminate, but again, it depends on the state and the contract.
Over the past few years, we have seen the market move strongly in the direction of the seller. The more contingencies the buyer places in the contract, the weaker the contract. Buyer contingencies are usually exits or negotiating points for the buyer.
So, the more certainty and the fewer contingencies a buyer can give the seller, the more likely the seller will come forward with an offer. This is where we would see full valuation gaps or no valuation contingencies, or sales as is with no inspection contingencies.
The other element to discuss is contingent supply based on contingent ownership. It’s usually when a buyer needs to sell a property to buy the next property.
The buyer’s offer is contingent on the sale of their home to be purchased, which means a domino effect can be created. If the buyer doesn’t sell, he can’t buy, then the seller can’t sell or buy the other side, and so on.
As the market has started to move towards a more neutral market, buyers are gaining strength and can use contingencies to better protect themselves in the market. We’ve noticed it in Denver over the past two months.
During the hottest parts of the Denver sellers’ market, we’ve seen these contingent real estate offerings become virtually non-existent. We started to see disruptors entering the market or bigger companies that would help the buyer buy before selling their home with bridge loans, cash offers on conditional ownership and many other examples to help a buyer who should sell and who wouldn’t. be able to buy with this contingent offer.
That said, we are starting to see the shift where a contingent real estate supply has returned along with the other eventualities. With all of the disruptors, there was usually an additional cost associated with using one of the buy-before-sell programs. Now we see that money flowing back to the seller who is about to become a buyer.
At the end of the line: As the market evolves, even in hot markets like Denver, expect more contingent real estate offers and contingencies to emerge as part of the process. It is a strong indicator of changing market conditions.
Bret Weinstein is the CEO and founder of BSW Real Estate in Denver. Connect with him on Facebook or Instagram.