A hypothetical condition is an assumption made contrary to fact, but which is assumed for the purpose of forming an opinion of value. The most common example of a hypothetical assumption is an appraisal for new construction, "subject to completion". In this case, the home’s appraised value is based on the current market value as if complete, even though the home may not be finished for several more months. The lender uses this appraisal for the purpose of construction lending by allocating installment construction draws to the contractor from the borrower's construction loan. When the home is completed, the lender sends the appraiser back out to certify the home's completion, typically but not always, for the original hypothetical appraised value.
Ever wonder how most real estate investors determine how much to pay for an investment property? The most common method used is called the Gross Rent Multiplier (GRM). To determine the GRM, the investor identifies three similar properties in similar neighborhoods that were rented at the time of sale and divides their sales price by the monthly gross rent. For example, three similar homes recently sold in the same neighborhood. Home A sold for $75,000 with a monthly rent of $600, giving it a multiple of 125. Home B sold for $80,000 with a monthly rent of $650, giving it a multiple of 123. Home C sold for $90,000 with a monthly rent of $750, giving it a multiple of 120. The investor now has come up with a GRM range of 120 to 125, giving them measurable data to determine how much they should pay for a similar type of investment property. The tricky part is knowing about or finding other investment properties that were rented at the time of sale.
A common dilemma many buyers face is whether to buy their new home first or sell their existing home first. If you don’t need to sell your home in order to buy your next home, then buying first is the most convenient option. If you sell first you may not be able to find your next home right away and may have to rent an apartment or home before you do. If neither of these two options are appealing to your situation, there is a third option, making a contingent offer to buy your next home.
In this situation, the contingent buyer should have already put their home on the market and identified a new home they would like to buy with the intention of closing on both their existing home and new home simultaneously. This can be tricky because it is risky business for any seller to accept a contingent offer without the buyer at least having their home under contract. If the buyer doesn’t have their home under contract, sellers are not inclined to accept a contingent offer since they don’t know when or if the buyer will get their home under contract. For the purpose of this article, we’ll assume that the contingent buyer has their home under contract.
So what happens next? Once the contingent buyer enters into a contract to purchase their next home, the seller is entitled to receive a copy of the contract on their buyer’s home in which they may or may not share confidential information such as names and purchase price. The reason to provide a copy of the buyer’s contract is to demonstrate that they do indeed have a contract on their home, showing the due diligence expiration date and closing date. Since a buyer can back out of the contract during the due diligence period for any reason, or no reason, it is important for sellers to know how long this period is. The shorter the period, the more attractive the offer, since time is of the essence. Once the due diligence period lapses, the earnest money comes into play and the chances of the contingent buyer backing out are less likely. In other words, the contingent buyer’s contract on their home is more likely to close giving the seller a greater peace of mind. Notice how I said more likely to close. There are still instances where your contingent buyer may not close, such as the buyer losing their job and having no choice but to breach their contract. Generally speaking, the best offers are the ones that are not contingent upon a buyer having to sell their home in order to buy your home. Having said this, if you don’t have any other offers or the contingent offer is substantially higher than the other offers, it may be worth the risk of entering into a contingent contract.
If you are ready to sell and buy but you have questions about the process, call Mary Staton or Bert Ward - they’ll be happy to answer any questions about the Contingent Buying.