Selling price, time on the market, and contractual contingencies

Abstract

Real estate contracts often have a wide variety of contractual contingencies. This study examines whether a property inspection clause, the sale of other property contingency clause, and a backup offer contract affect a property's time on the market and selling price. A theoretical model is created based on the relative bargaining power between the buyer and seller. Using a large sample of transactions from Miami-Dade County in South Florida, we find that contingency clauses are significantly affected by market conditions, time on the market, list price premiums, brokerage characteristics, home size, and age. The time on the market (TOM) for purchase contracts with a property (pending) inspection clause or a backup offer contract is shorter. In contrast, the TOM for a sale of other property clause is longer. When holding constant TOM, buyers pay less for properties with a property inspection clause. In comparison, sellers receive a premium for properties with a sale of other property contingency clause. A backup offer contract has no effect on the selling price.