Manhattan buyers, concerned about the difficulty of obtaining a loan in the wake of the subprime mortgage crisis, are more reluctant to purchase apartments without a mortgage contingency clause in place.
The desire for a contract with a mortgage contingency, where the purchase is dependent upon the buyer obtaining financing, is not new, but the request is now more commonplace, and that pool now includes qualified buyers who in the past did not need this added security measure.
However, making this demand can threaten deals — or, in some cases, cause them to fail.
“The addition of a contingency clause may cause a deal to stall because the seller could see this option as a bad faith or unsure decision,” said Fabienne Lecole, a vice president at the Corcoran Group.
For buyers, especially those at lower price points, it makes sense to request a financing contingency, which allows them to pull out of the contract easily if they do not get mortgage approval — and have their deposit refunded.
For sellers, however, a contingency clause request is not desirable.
“The seller takes the risk of losing time as the buyer will wait to receive his mortgage acceptance, which can take at least two weeks, sometimes more. In the meantime, the seller waits — anxiously,” Lecole said. “The buyer could also change their mind and use that excuse as a way to get out of the contract.”
The end result, in some cases, is that a buyer requiring a contingency gets turned down by sellers who do not want that kind of deal, or gets shut out by another buyer who’s willing to pull the trigger without one.
Lecole noted she had a client that had accepted an offer from a qualified buyer at the asking price, but that the buyer’s attorney refused to proceed without a mortgage contingency. Her seller relented because the unit had languished on the market for several months.
Unrelated complications ended up killing the deal.
Robert Kravath, an associate broker with Barak Realty who represented the buyer, faced a similar situation with another deal.
“We had a buyer who was putting down over 50 percent and had a commitment letter from the bank in hand,” he said. “And still their attorney wanted to add a mortgage contingency to the contract. He scared them with the risk of losing their deposit, which simply wasn’t a reality.” Rather than considering lower offers, the seller finally agreed to add the contingency to the contract.
Some buyers are not so lucky.
Douglas Heddings, a senior vice president at Prudential Douglas Elliman, had a deal in August that fizzled when the attorney for the seller, his client, urged him to not sign a contract with a contingency. Heddings advised otherwise because it was the only offer they had received in a market that was not as hot. The client took the advice of the attorney — and as of last month, the unit was still on the market.
A departure
For years, the strong Manhattan market made non-contingent deals the rule. Sellers could insist on non-contingent deals, and buyers felt comfortable taking them because they were confident that they could acquire financing.
But that’s now changed. Of the 10 deals Heddings had in the works last month, two or three were contingent on financing, up from none last year. The last time he saw contingencies, he said, was in the early 1990s — until the market heated up in 1996 and the balance of power shifted to the seller’s side.
Even in cases where the seller is ready to move forward with a contingency arrangement, attorneys are interceding, sometimes at the peril of their clients.
“What I’m getting is quite a bit of grief from some of the attorneys saying my client [a seller] absolutely won’t accept a financing contingency,” Heddings said. “In the effort to act in the interest of their client, they could in fact be hurting them by not allowing them to sign a contract with a finance contingency.”
Contingency issues don’t generally arise in new development deals.
“In recent memory, it has been standard practice among Manhattan new developments across the board to not allow for financing contingencies in purchase agreements,” said Tricia Cole, COO of Corcoran Sunshine Marketing Group.
“However, this is not without exception, and is not always the practice in all areas,” she said. “For instance, some smaller developers have allowed them, especially in boroughs other than Manhattan; and practices in other states vary widely. Common among those exceptions we’ve seen in New York and surrounding areas is to only permit a financing contingency if a specified lender is used, otherwise no contingency.”
But, most contracts in Brooklyn are contingent on the buyer getting financing, said Roslyn Huebener, principal broker and owner of Aguayo & Huebener Realty.
Although anecdotally some brokers claim that the mortgage meltdown is driving the increased push for contingency clauses, other real estate pros say the credit crunch has not led to a marked increase in them.
“We are not seeing financing contingencies in any real numbers yet,” said appraiser Jonathan Miller. “However, what we are seeing are deals where the buyer won’t sign the contract until the mortgage commitment is issued.” Furthermore, “brokers are requiring this be accomplished in 10 days or less to protect their sellers,” he said.
Allan Trub, a vice president at New York Mortgage Company, said he has not actually had any deals in Manhattan where a mortgage contingency was included.
“If you’re buying in Manhattan, you’re generally above the subprime mess,” Trub said. “You’re going to be largely unaffected by this.”
Another significant factor slowing up deals is the increasingly restrictive standards placed on lenders.
The credit crunch has created stricter underwriting requirements, and banks are taking longer to grant commitment letters to purchasers, said Sandor Krauss, a real estate attorney who has an eponymous firm in Manhattan. “It’s taking what I normally see as a 10- to 15-day process as now more like a 20- to 30-day process,” he said.
Piling on protections
In an effort to further protect themselves from being on the hook for a deal they cannot afford, buyers are adding other caveats to their contracts, like a contingency with a cap on the interest rate or a contingency subject to an appraisal price that is equal or greater to the purchase price, Krauss said.
Buyers are also asking for higher contingency rates. Krauss is seeing 85 to 90 percent contingencies, rather than the 70 to 80 percent recent norm, Krauss said, meaning that the purchaser has to be able to secure a mortgage equivalent to 85 to 90 percent of the purchase price in order to be bound to the contract.
Other brokers said that buyers can ask for a contingency, but their sellers are not going to agree.
Kathy Braddock, co-founder of Braddock + Purcell, a real estate advisory firm, said that the back-and-forth over contingencies is always an issue. While a buyer’s attorney wants to make certain his client can secure a mortgage, she says she has “never yet had a contract when a buyer is signing a contingency clause.”
She added: “Our buyers are signing non-contingent clauses because our sellers are not tolerating the wait-and-see period.”
Rena Goldstein, a senior vice president at Halstead Property, said that “sellers are not comfortable about taking an apartment off the market to wait to see if a buyer will qualify for a mortgage. They lose momentum; they might lose another deal where the buyer was already approved, and they run the risk of returning to the market as a stale listing.”
Goldstein said that when she works with a buyer, she cautions them “that they are not going to get a deal contingent on financing so that, for their own peace of mind, they should get themselves prequalified for a mortgage so they know there is no issue about financing.”