WHAT'S A CONTINGENCY REMOVAL GUARANTY?
An Active Rain member asked "Why do buying contingencies not work there? I wrote that they "seldom work here" but didn't say why.
You've seen the advertisements in the local newspapers on the real estate pages on Friday or Saturday"
"We'll Buy Your Home If We Can't Sell It"
or
"Buy A New Home From Dream Builders And We'll Buy Your Old Home, GUARANTEED"
That's what we call a "Contingency Removal Guarantee". The process is simple.
1. You sign a contract with the builder for new construction.
2. You give the builder a 5-10% deposit, which is non-refundable, as are most new home deposits after the HOA review period has passed.
3. The builder refers a listing broker to list your house. That's where the trouble may begin. The buyer is committed to buying the new home.
4. The builder is working with a Listing Broker who agrees to list your home at a slightly reduced commission, but you must agree to a hard schedule of price reductions in the Listing Agreement. The listing agent says that your home has a market value today of, say $200,000. Your payoff is $130,000. The listing agent prepares a listing agreement with a schedule of price reductions similar to:
List Date: List Price: $200,000
Day 30: 1st Price Reduction: $190,000
Day 45: 2nd Price Reduction: $180,000
Day 60: 3rd Price Reduction: $170,000
Day 90: 4th Price Reduction: $150,000
THE PROGRAMS USUALLY REQUIRE VIGOROUS PRICE REDUCTIONS: The price reductions are usually 15-30 days apart and are automatic based on the listing agreement. The theory behind the "Contingency Removal" programs are simple. You have equity in your home. You need to sell the existing home in order to qualify for the new home financing. You agreein the beginning of the listing period to scheduled price reductions which make the home easier to sell as the price goes down and the buying pool
increases accordingly.
In a good market, this may work, although most home owners can sell a home for market value in a reasonable amount of time if the house presents well and is accessible. By agreeing to a schedule of price reductions, the home owner may rush to contract. They already have a significant amount of money deposited with the builder and MUST sell their existing home. So, they agree to the scheduled price reductions which are usually very
harsh and cost many home owners a significant loss of equity.
THE BUILDER WILL WAIT UNTIL THE PRICE IS AT THE LOWEST POINT: If the home gets to the point where the builder will buy it, you can be sure that the builder will not execute that option unless the price has been reduced to a point where the builder is buying the home at a price where the home can be sold and the builder will not incur a loss.
We've seen these programs come and go in our area and they don't usually last very long. Brokers or builders will set aside $2-3-5,000,000 or more to fund the "Contingency Removal Guaranty Program" and as the fund is reduced by purchases, the programs are closed. Builders, through agreements with brokers often have standing inventory of homes for sale that they purchased through the guaranty program and in a slow market are unable to sell vacant homes.
THE DEVIL IS IN THE DETAILS: The program will work for the consumer if their contingency sells quickly before the harsh price reductions eat away at their equity. The program will work for the builder if the pricing is carefully done and the homes selected are easy to sell.
Sell the Old Home.
Buy the New Home. 
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Hi Lenn -- Thanks for a great post. I wondered how these programs worked and you sure explain it well. Thanks and have a great 4th
Boy, and isn't it a big devil Lenn! I've seen plenty of homes on the market selling for almost full list price that have been there for 90 days or more. I have a listing currently where road work was started on just after I got the listing. By this formula, because of this "guarantee" they would be giving their home away by now. I guarantee that they won't take 50K less than list price!!!
Great post, I think the next time I am out scouting the market, I will stop and ask some tough questions.
Thanks for the information. A bit tricky and don't believe I would do it and therefore recommend it. Another informative post.
This, I haven't seen before. Does the builder have a direct relationship with the listing company (as in, own them) or is it the listing company that's the culprit, or both? I've experienced a separate entity listing the property with an agreed upon purchase price prior to the new home contract. While it rarely went to a buyout, when it did, it was all above board- typically 7% below market at the buyout price. What you've described is very concerning, and as a buyer, I'd steer clear.
Scary stuff, Lenn. Talk about getting into a potential trap. I agree with your two last statements!
Have a great holiday!
Jeff
Lenn - Thank you for taking time to answer my question in detail. This scenario would NOT be good for my sellers, and I agree, sell the old home, then buy the new one. The way this works, in our current market, the seller would have nothing to invest in the new home. We have not had the extraordinary equity increase most of the country has had. The VP for the homebuilder has not called me back yet to let me know the details of their program.
Hi Lenn, another great post, this is a public service post that trains people and agents on the "How to" and "What to look for" of the new construction buying process.
Some agents also offer these "I'll sell your home in 60 days or I'll buy it" guarantees. I suspect they have a similar listing contract. The people that enter these guarantees are probably the same people that say "my home should sell quickly"!
Thanks for explaining these programs in more detail - I always wondered about them.
Hi Lenn -- Thanks for a great post. I wondered how these programs worked and you sure explain it well. Thanks and have a great 4th
Bruce. My pleasure. They work. They just don't work to the benefit of the new home buyers.
Boy, and isn't it a big devil Lenn! I've seen plenty of homes on the market selling for almost full list price that have been there for 90 days or more. I have a listing currently where road work was started on just after I got the listing. By this formula, because of this "guarantee" they would be giving their home away by now. I guarantee that they won't take 50K less than list price!!!
Chris. You're right. The buyer really can't win in these programs. But, they sell homes for the builders.
Great post, I think the next time I am out scouting the market, I will stop and ask some tough questions.
They are becoming more popular around here with homes so hard to sell.
Thanks for the information. A bit tricky and don't believe I would do it and therefore recommend it. Another informative post.
Miriam. I don't recommend them either. The new home buyers is really better off renting the old house.
This, I haven't seen before. Does the builder have a direct relationship with the listing company (as in, own them) or is it the listing company that's the culprit, or both? I've experienced a separate entity listing the property with an agreed upon purchase price prior to the new home contract. While it rarely went to a buyout, when it did, it was all above board- typically 7% below market at the buyout price. What you've described is very concerning, and as a buyer, I'd steer clear.
Laurie. The builder has a relationship with the listing broker/agent. They refer the buyers to the listing broker who collects a commission when the resale home sells,
and often, if the new home agent is licensed, will pay a referral fee to the referring agent/broker. It's an incestuous relationship at best.
Scary stuff, Lenn. Talk about getting into a potential trap. I agree with your two last statements!
Jeff. Thanks for the comment. It's not a good program for most consumers. They lose Thousands.
Lenn - Thank you for taking time to answer my question in detail. This scenario would NOT be good for my sellers, and I agree, sell the old home, then buy the new one. The way this works, in our current market, the seller would have nothing to invest in the new home. We have not had the extraordinary equity increase most of the country has had. The VP for the homebuilder has not called me back yet to let me know the details of their program.
Paula. You sure want to check it out very carefully before recommending anything to a client.
Hi Lenn, another great post, this is a public service post that trains people and agents on the "How to" and "What to look for" of the new construction buying process.
Thanks Gary. If all consumers worked with a good real estate agent, these programs wouldn't be around.
Some agents also offer these "I'll sell your home in 60 days or I'll buy it" guarantees. I suspect they have a similar listing contract. The people that enter these guarantees are probably the same people that say "my home should sell quickly"!
Thanks for explaining these programs in more detail - I always wondered about them.
Elaine: I'd bet money that they offer a VERY low price for the property.
I offer this guarantee and have only used it once. It's really great at making the phone ring but honestly the program isn't great for most folks. Who it DOES work for is a seller who MUST sell the house and is willing to take a hit to make it happen. Which shouldn't be the situation if you're moving up...so in this scenario it doesn't make sense to me. But there's something for everyone, depends on the client, depends on the program, depends on the market. Depends on the professional to explain the heck out of it so everyone understands!
Lenn, I have not come across this as of yet, but I am sure I will sooner or later, so thank you for the explanation on how it works. Now I can explain it to my Borrowers as well.
These programs are just bad news for everyone.
Lenn: This scheme sounds like something my friendly Piranha Brothers might employ. Only they wouldn't be as fair-minded as your builders!
Jay
I offer this guarantee and have only used it once. It's really great at making the phone ring but honestly the program isn't great for most folks. Who it DOES work for is a seller who MUST sell the house and is willing to take a hit to make it happen. Which shouldn't be the situation if you're moving up...so in this scenario it doesn't make sense to me. But there's something for everyone, depends on the client, depends on the program, depends on the market. Depends on the professional to explain the heck out of it so everyone understands!
Leigh. When builders offer this program, the only ones that benefit are the builder and the listing agent referred by the lender. You are right. The sellers need to read the fine print VERY carefully.
Lenn, I have not come across this as of yet, but I am sure I will sooner or later, so thank you for the explanation on how it works. Now I can explain it to my Borrowers as well.
George. Thanks for commenting. Try to explain the unknown to new home buyers that "just want a new home".
These programs are just bad news for everyone.
Bruce. I agree. Thanks for reading.
Lenn: This scheme sounds like something my friendly Piranha Brothers might employ. Only they wouldn't be as fair-minded as your builders!
Jay
Jay. Yep. It sounds like a Piranha Brothers special. We're getting more of these ads these days than I've seen in 15 years. The market is ripe for them.
I see this as a gimmick. And I won't work with a person who thinks they are so smart that I cannot see thru their gimmick.
Hi Lenn,
Something similar here as well.....Guaranteed Sales Program....Raises Questions and I still feel the agent does not work in the sellers best interest
Dick Beals
Wow, that does sound like a scam and I am amazed that people would even come close to agreeing to it.
Oddly enough, consumers often ask about the program and if I offer it to them as potential sellers. They ask for they have gotten a mailer from another agent who does. If they are motivated and realistic, it is worth the time to explain to them exactly how the program works, as Lenn outlined, for many time once they know, they are nowhere near as intrigued by the program as when they first heard about it. It learly can offer a seller complete piece of mind knowing they will be able to purchase their new home and in their eyes, get a great "deal" on their new home, if they have the equity in their current home and the financial capabilities to take 10-20% less many times. More often tho, I have found it better to get their home under contract and find a builder with a home either currently under contstruction or a spec home for they are much more willing to negotiate on the price to get rid of a home they have no use for and no buyer for. The seller ends up much happier in that situation, from my experience, for they end up paying less than they would have had they had the home built. As well, if they are not building a home, they usually get their new home from a seller for less after that home has sat on the market for quite some time!