Am working on a potential deal to buy a fixer with a client.
When I called the listing broker to get guidance on the offer, I was told they already had non-contingent offers and that my clients would need to make one themselves in order to have a shot at the property.
What’s a non-contingent offer? Recall that, in a normal sale, the buyer goes into contract and then has a contingency period to do physical inspections of the property and review all of the relevant documentation and disclosures before deciding whether to buy or cancel the deal. A non-contingent offer is one where the buyer agrees to buy without doing any of this diligence.
This is extremely risky, so, generally, you only do it when you’re getting a deal so cheap that you figure you can solve any problems that emerge. An example of a non-contingent offer is when you bid on properties at trustee sales (foreclosure auctions). The prices are right, so you tak the risk.
It’s not hard to understand why a seller might want to ask for non-contingent offers, because they provide certainty that the buyer will buy at the price he’s offering. But it’s also dangerous for the seller, because, in the event that a buyer buys the property and then finds something bad, he can come back and sue the seller. In an ordinary sale, the seller’s first defense is that the buyer had plenty of opportunity to investigate the property and should have uncovered the problem. In a non-contingent sale, the seller does not have this defense.
There is a way to get non-contingent offers safely, which I’ve used before. Prior to listing the property, you put together all of the disclosures, leases, books and records. You provide these disclosures to all interested buyers. Then, on an appointed day, you give all of the buyers access to the property to conduct whatever inspections they want to conduct. Then, once the buyers have all of the information they need to make an informed decision, you ask them for non-contingent offers. This way, you get certainty and they get a fair crack at investigating the property.
(Incidentally, the problem with running this kind of non-contingent process is that some buyers refuse to spend the money they need to spend to do a proper investigation unless they have the property under contract, so you’re narrowing your pool of prospective buyers.)
In this case, the sellers were not offering to show us the disclosures, so we couldn’t do a true, non-contingent offer. I can’t have a client irrevocably commit to buying a property, only to find out that a tenant who is supposed to be paying $1000 is really paying $500 and has been using the property as a meth lab for decades.