Contingent Offers Podcast – selling a home and buying a replacement property

A discussion about the logistics of buying a home when you must sell your current home first. We discuss why and how you should avoid making an offer on the new home that is contingent upon the sale of your current home.

The following text is a transcript of the podcast…

Hey friends, thanks for tuning into this episode of the Northern Colorado real estate ramp-up podcast. This is Ryan Jenkins. Today we’re going to talk about what it’s like and what to do when you need to sell a house and buy another house at the same time. This is, , something that a lot of our clients run into and this competitive market makes this process particularly difficult because a lot of people financially need to sell a house before they purchase another house. And because there are, because this is a competitive market, sellers do not look favorably on people that have a, what we call a contingency. So I’m going to use that term in this podcast. When I say a contingency, that means when you are making an offer to buy somebody’s house, you, your contract is contingent upon the sale of your current home. And you may or may not have that home on the market yet.

If you have it on the market, it looks better than if you don’t have it on the market. If you don’t have it on the market, that seller is going to be like, Oh man, we’re gonna maybe look and try to work with somebody else because they know that the purchase of their house depends on the sale of your house. It’s just one more layer of complexity. And so we try to avoid those situations. And the way we do that, first of all, we see if our clients can potentially qualify to carry both mortgages at the same time. That doesn’t mean they in that we want them to or that they intend to, maybe for a very short period of time. But if you can qualify to carry both mortgages, even though you intend to sell your house first, a lot of times simultaneously as you’re purchasing the other house, if we can get a mortgage broker to say, this person is good for carrying both mortgages, they qualify, then we can do what we call a non-contingent preapproval letter.

And we can couple that with the offer that we make on any property. And we look just as good as anybody out there who doesn’t have to sell a house or you know, her or his don’t not need to sell a house to buy this one. So that’s the, that’s you know, the best case scenario. But a lot of people can’t do that, you know, that’s a tall order. Um, to ask somebody to qualify for both, you know, you gotta make a pretty good chunk of money. I mean, it really depends on a lot of different factors. It depends on how much debt you’re carrying. It depends on your income. It depends on, you know, the total monthly payment on both those mortgages. But I think you would be surprised. Most people are surprised when, you know, because debt to income ratios are higher than I think a lot of people think that they are.

Basically a lender will allow you to qualify if the total amount of debt that you’re carrying is 45% or less of your gross income and gross as income is the key. That’s like your, you know, your adjusted gross income on your income, on your tax returns. So it’s always worth checking. Even if you think you might not be able to do it. It’s worth looking at because some people don’t, you know, have a lot of debt and even if they don’t make a ton of money, they might be pretty close. And if we can just squeak in there, that’s all we need to be to be able to make those non-contingent offers and put, put you into a very good position to buy a house. Um, and not technically have to sell your house first. But if we can’t do that, there are other options as well.

One of those options is to get a co-signer. A lot of times people will ask a parent or relative to co-sign on the loan, but basically what we’re doing is asking them to tell the mortgage broker, Hey, in the event that my son or daughter or whatever the case may be, cannot or does not sell this house before they purchase the other one. I will be a co signer on the loan. But the intent and we tell the co-signer, this is the intent is not to um, not to have that ever come into play. We don’t ever want you to actually be a co-signer. We just need for the purposes of the approval letter, we need you to agree to be a co-signer. And so that’s another way that we can potentially get around, um, making those contingent offers and not having that, that home sold when we make those contingent offers.

So it’s another thing to consider is asking a relative, if you don’t have a relative or you don’t want to ask for that, I know it’s a tall order to ask somebody to do that even though we don’t intend for them to do that. Sometimes that explanation is not as clean and easy as we would like. Another option is to just go ahead and put your house on the market. So ideally we’re doing this in the summertime when the most house, the most homes are on the market. But you know, we might do this anytime of year. So if you need to sell your house and you need to buy a replacement property, lessee, you need a bigger home. We just go ahead and list your home for sale and then we start shopping right away for on. On the one hand, it looks better.

If you make a contingent offer, it looks much better if your property is already on the market or potentially under contract, then it does. If you’re making this offer, this contingent offer, and your home is not even for sale yet, you know, that doesn’t look very strong. But if it’s already on the market, even better, if it’s under contract, you’re gonna have a better chance of getting a contingent offer accepted by a home seller, especially if that seller, you know, not every home in Northern Colorado sells instantaneously. We, you know, we got plenty of homes that had been on the market for a few weeks or maybe a couple months. In those situations, you might have a much better chance of getting a contingent offer accepted. But the problem is even if you can get that contingent offer accepted, you’re just going to pay a little bit more for that property.

You know, it’s my estimation, this is a little bit of a shot in the dark. It’s hard to quantify exactly, but kind of based on experience. I think people pay 10 to $15,000 more for a home when they have a contingency, even if it’s not a competitive situation. Um, just because the sellers are, you know, they’re, they know that there’s another layer of uncertainty that’s being added on. And essentially when you go under contract with somebody who has a contingency to sell a house, basically if they don’t sell that house, you’ve taken your house off the market for a period of time and the buyer really doesn’t have a lot of skin in the game. Now you can structure an offer in such a way where maybe there’s some nonrefundable earnest money that comes into play, but that’s usually not how the deals are structured.

Usually, the buyers basically saying, OK, we, here’s the price we agree on. I’m going to go put my house on the market right away and we’re going to hope it sells. But if it doesn’t sell, you’ve basically wasted, you know, 30 days or two months or three months of market time and you don’t have a lot to show for it. So that’s, you know, obviously why people like why sellers don’t want to take those contracts. Um, so another way we approached this, if our folks cannot qualify for both homes at the same time is we will put the home on the market and then once we get it, well basically we’ll advertise in the MLS that we want a two month lease back after closing. So essentially what we’re saying is anybody that buys this home, we’ll give you extra brownie points if you are willing to let us stay in this house for up to two months after closing.

And the reason I say two months is because most mortgages have a clause in there that says this mortgage is an owner-occupied mortgage and the buyer must take possession within two months of the closing date. So that’s usually the max of the leaseback that we can get. If it’s a cash deal, you could, it’s whatever you can negotiate. Maybe you could do three months, but basically what this leaseback does is it allows us to get your home closed, but you get to stay in your home until you have the money in hand to go buy your replacement property. And that’s an ideal situation. So a lot of times, you know, let’s say we go under contract, there’s usually a 30 day period between the time we go under contract and the time we close. And then you have another two months after that where you’re still getting to live in your house.

You’re most of the time paying rent to the person that bought your house. So they turn into the landlord, you turn into the tenant, you’re paying rent, you have the money in hand, you get to go shop and you can make a non-contingent offer on your replacement property if that two months time. If you don’t lion find a home that you like within that two month period of time. We also have furnished months, we call them executive rentals. They’re furnished month to month rentals. You pay 30 days at a time. Usually, there are about $2,000 a month and that gives you an additional, you know, place to land. So you don’t have to like ask for a favor. I mean obviously if you have a family member, you can sleep on their couch, that’s great. But if you don’t want to put somebody out that way and you want and you don’t want to feel prepped, the pressure of being potentially homeless.

My least favorite situation in real estate is when somebody is under the gun to buy a house. I just don’t like, I mean, obviously people do that. They come into town all the time and they’re, you know, they, a lot of times we have people come from out of town, they have a certain period of time to find a house and it happens all the time that they do that. And some people are just fine operating that way and they want to be done with the process. But I like people to not feel that pressure. So I am always pushing my executive rental option. You pay 30 days at a time, you get a nice place to live. It’s all furnished so you don’t have to move in and then move out again. A lot of times people will put their stuff on pods, maybe they sold a home in another state, they’ll put their stuff in a, you know, some sort of temporary storage and then they live in this executive rental and they pay 30 days at a time and have all the flexibility in the world to wait for the perfect house.

And in my opinion, that’s the best situation for making the best decision for making a house that, for buying a house that you’re going to be happy in longterm. So I hope that helps folks. That’s a little bit of a quick picture on what you can expect when selling and buying. Um, if you’re in that situation, feel free to reach out and we’d love to talk through your specific situation and what we recommend, but that should give you an idea of how we work through those situations in this difficult market. There’s a lot, a lot of nuances and a lot of different things to take into consideration to be able to compete and, get a home under contract, get the right home, under contract in the right period of time. So thanks again for listening guys. Check us out on the web, gray rock realty.com. Again, it’s Ryan Jenkins. If you ever would like to call or text me (970) 689-0824 is my cell phone. Be happy to talk with you about any way we can help you real estate wise. And again, thanks so much for listening. Have an awesome day. See you guys. Bye.