Contingent or Not Contingent…That Is Indeed THE Question

The state of the Manhattan real estate market remains stable but some of the rules that have been followed for more than a decade are meeting resistance and dare I say, may be changing.  Of course my experience is anecdotal but I always try to get a sense of market conditions from my colleagues anytime I’m preparing to write about the goings on in Manhattan real estate.  Something that seems to be happening with more and more frequency is the request for the financing contingency in contracts.

For more than 10 years during the housing boom, sellers have had the upper hand and in the case of financing contingencies, they were almost NEVER permitted.  In addition to lax lending practices that gave everyone the confidence that they would procure financing, there were almost always multiple buyers vying for the same property.  Striking the financing contingency from a contract gave a bidder more leverage and the seller more comfort that the prospective purchaser was confident that they would close on the property.  As the sub-prime and ALT-A mortgage mess is trickling UPHILL now, we are seeing more and more attorneys advising their clients against signing a contract that is not contingent of financing.

If you’re not sure what this means, here are the 3 financing options as written in a boilerplate Julius Blumberg Contract of Sale (Co-op):

•  1.20.1 Purchaser may apply for financing in connection with this sale and Purchaser’s obligation to purchase under this contract is contingent upon issuance of a Loan Commitment Letter by the Loan Commitment Date.
• 1.20.2  Purchaser may apply for financing in connection with this sale but Purchaser’s obligation to purchase under this Contract is not contingent upon issuance of a Loan Commitment Letter.
• 1.20.3  Purchaser shall not apply for financing in connection with this sale.

These are the 3 options.  No more, no less.  For the past 10 years or so, almost every contract has stricken 1.20.1 and 1.20.3 leaving the purchaser the ability to obtain financing but protecting the seller from the buyer walking away should their mortgage not be approved.  If the buyer was unfortunate enough to sign a contract this way and not procure financing, they would forfeit the 10% deposit that they submitted with the signed contract.  In 16 years, I have NEVER seen this happen.  That said, attorneys seem to be much more gun-shy about advising their clients to sign non-contingent contracts in today’s bizarre lending environment as more well-qualified borrowers are experiencing the frustration of stricter lending standars.  For example:

• Purchaser with $4M in cash buying a $2.7M property was advised by his attorney against signing a non-contingent contract…they lost the apartment to another bidder.
• Multiple purchasers having agreed to sign non-contingent contracts were advised by respective attorneys that banks were finding reasons not to close on loans increasing the risk of losing that 10% deposit.
• Prospective purchasers concerned about their future employment are also balking at the non-contingent contract.

The non-contingent contract is no longer a given.  Fortunate sellers have more than one bidder thereby allowing them to continue to insist on non-contingent contracts.  Other sellers are being presented with 7-14 day contingencies as opposed to the standard 30 day.  Whatever the case may be, sellers are more frequently being faced with the decision to allow a prospective purchaser the make their contract contingent on getting a loan.  And in today’s lending environment, that makes a seller much more anxious than they have been in quite a long time.  It also makes it that much more important to have qualified buyers at the table who are represented by savvy and sophisticated real estate agents, mortgage professionals and attorneys.