Seller contingencies return

Some sales agents say that as the housing market cools, the number of home-sale contingencies is rising.

Jim Buchta, Star Tribune

Published March 03, 2006 in the Star Tribune

When Kjersten and Jason Struck decided to sell their downtown Minneapolis loft and move to a single-family house with a yard, they fell in love with a home in Deephaven.

Knowing that the condo market wasn't as hot as when they bought two years ago, they did something unusual for the Twin Cities: They said they'd buy their dream house only if they first could sell their loft.

"It seems like a lot of people have a bad taste in their mouth about contingent offers, but as a buyer, you're crazy not to go contingent in today's market unless you've won the lottery," said Kjersten, a nurse practitioner.

The return of that contingency is the latest sign that it's no longer a seller's market in most price ranges. According to the Minneapolis Area Association of Realtors on Monday, the absorption rate in the Twin Cities metro area -- the time it would take to sell the current supply of houses on the market -- is 4.4 months.

And while that absorption rate is slightly lower than it was six months ago, the number of houses on the market is rising to record levels, and sales agents say that an increasing number of sellers are signing purchase agreements with a catch: The deal isn't real until the buyer's house sells.

A year ago, such contingencies were a kiss of death for many deals because buyers were plentiful, the inventory of homes was low and competition for them was stiff. Today's market times are less predictable.

"I used to feel comfortable saying that your house will sell in a certain amount of time," said Fritz Kroll, a sales agent with Edina Realty in Minneapolis. "I'm not willing to take that on any more."

Kroll said a quarter of all transactions he's been involved with in recent weeks have included contingencies as a growing number of sellers discover that it can take longer to sell a house than to buy one and they don't want to carry more than one mortgage.

Jeff Scislow of ReMax Results sees the same trend. "A lot of people got caught when the market slowed," he said.

As a result, he said, "they ended up owning two houses."

Home-sale contingencies are agreements that say that a transaction can be completed only after certain conditions are met by a particular date. There are several kinds of contingencies, including inspection and financing approval, which generally are palatable to sellers. Home-sale contingencies, by contrast, can prove be among the most onerous for sellers. That's because even though a seller who has accepted a contingent offer can still market the house and accept other offers, many buyers are reluctant to consider houses with contingent offers because the contingent buyer usually gets an opportunity to waive the contingency if another offer is presented to the seller. For example, Penny Ehlers of ReMax Advantage Plus said her contingency agreements give contingent buyers 48 hours to waive the contingency if the seller gets another offer.

And after paying for an inspection and getting their hopes up, that can be devastating for a prospective buyer. "Do you want to go through the emotional pain of hoping you'll get it, but knowing that someone else could?" Ehlers said. She has a client who is trying to sell a house in Prior Lake and made a contingent offer on a house in Isanti. The sellers wouldn't accept the contingency because they're trying to buy another house with a contingent offer, and the sellers of that house aren't comfortable knowing that their transaction can't close if the owner of the house in Prior Lake doesn't sell his house.

"Would-be buyers and sellers are more cautious, and approaching the market with contingency mentality," Scislow said. "Sellers must get used to the reality of the market" before saying contingencies are a bad thing.

He said that home-sale contingencies are more likely to come from move-up buyers who lack sufficient income to support two houses. First-time buyers have nothing to sell, and the ultra-rich usually can afford multiple mortgages.

Shawn Anderson and his fiancee, Amber Bruzek, are typical of those who fall into that category. When they decided to buy a new custom home in Jordan, they first had to sell their Shakopee townhouse. Last fall, they signed the purchase agreement to buy their new house contingent on the sale of their townhouse, which had plenty of competition. Anderson said more than 300 townhouses were for sale in the Savage-Shakopee area. Their home got lots of showings, but as the months wore on without offers, they started getting nervous.

"We went from July to November wondering why we weren't getting any offers," Anderson said. By December, "we were dead in the water" and about to give up.

Anderson had been doing some work on the house, but he stopped visiting the job site. "It was extremely stressful," he said. By January, just weeks away from their planned moving date, Anderson's parents offered to buy their townhouse and sell it themselves to relieve the pressure of an impending closing.

Sales agent Stu Francis said that deciding whether to accept a contingency requires careful consideration. Many sellers, for example, still are being too aggressive in pricing their properties or are unwilling to be as flexible as they need to be in a changing market, one in which it could take months to sell.

He recently worked with a client who bought a house for about $640,000 that had been put on the market for more than $830,000. The seller had accepted a contingent offer that fell apart after about 100 days on the market, and eventually ended up listing it with another agent. Francis speculated that because the house remained on the market during the contingency, other prospective buyers began to wonder if there was something wrong with it. The sellers ended up settling for nearly $100,000 less than they had paid for the property.

That's why the Strucks decided to put off buying until they sold their downtown condo. After a non-contingent offer bumped their contingent offer on the Deephaven house, they weren't willing to risk a similar situation again.

After receiving a purchase agreement for their loft just two weeks ago, they started shopping again and quickly found a house in a popular south Minneapolis neighborhood that they like even better than the one they lost.

Because they have a qualified buyer for their condo, they were able to make a non-contingent offer and avoid the emotional roller-coaster ride that can come from with falling in love with a house and making a contingent offer that could fall apart.

"That's just the kind of risk you take," Struck said. He advises buyers with contingency agreements not to get their hopes up. "You can't get too emotionally attached because it's not your house."

Jim Buchta • 612-673-7376

Jim Buchta is at jbuchta@startribune.com.




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