How Does A Home Sale Contingency Work?
Tight housing inventory or personal financial circumstances often drive the need to make the purchase of a new home conditioned or “contingent” on the sale of your existing home. To decide if it is an appropriate tactic for your home buying (and selling) strategy, you will want to understand the details that make up a contingency home sale before jumping in feet first.
While there are a few different types of real estate contingencies, the one you will see most often is the home sale/settlement contingency. They are used to protect buyers who may need to sell one home before buying another one.
How does a contingency home sale work? Let’s peel it back and take you through the process to determine if a sale contingency is an option you want to consider.
What Is a Sales Contingency?
A sale contingency is a clause in a home purchase offer contract that makes the closing of the new home sale contingent on the sale of the buyer’s existing home. It is pretty straight forward, especially if it is contractually clear what will occur if the buyer’s existing home sale does not work out.
There is no one size fits all situation so each buyer/seller needs to weigh their options carefully before entering into a contract with a contingency attached. If you are unsure how to proceed, your real estate professional should be able to provide the pertinent details, including the pros and cons of a contingency home sale.
Does a Sale Contingency Protect Buyers or Sellers?
A sale contingency, also referred to as a contingent sale offer, protects the buyer of the home because it gives them a way to exit a home purchase contract if they do not sell their existing home.
If a sale contingency is invoked, the seller is free to to put their home back on the market (assuming it came off to begin with) to attract a new buyer. Sometimes the original buyer comes back but many times the seller ends up closing on their home with a new set of buyers.
For obvious reasons, sellers are often hesitant about contingency sales, and in situations where they accept an offer, they will often put in a kick-out clause that allows them to keep the home listed in-case another buyer comes along without a contingency offer. If that happens, the original buyer typically has a certain time-frame (often up to 72 hours) to remove the contingency and buy the home or lose it to the next buyer.
When Is a Contingency Home Sale Used?
The most obvious reason for a buyer to write a contingent home sale offer is when they cannot afford to buy without selling first.
Another common scenario is when certain local markets have low housing inventory for sale, making it difficult for a buyer to sell before buying and leaving a large gap between the sale and the purchase. Unless they are willing (and can afford) to move to an interim home between the sale and the purchase, a sale contingency is a solution.
But in low inventory markets, sellers often see multiple offers so they are less inclined to accept a contingent sale offer. One alternative buyers can use to trim the gap between selling their existing home and purchasing a new home is to negotiate a “rent back.”
This is when the buyers agree to let sellers rent the home back after the closing—this can be for as long as the parties negotiate, but one of the most important mortgage documents buyers sign is the note which requires them to move into the home within 60 days (if it is an owner-occupied loan).
What Do Buyers Need to Know About Contingency Offers?
If a buyer can get a seller to accept a contingent sale offer, they are well-protected. But the seller might ask a lot of questions and look to limit the sale contingency timing. Here are a few things buyers should think about:
- Look for sellers who do not have strict time constraints so they will be more receptive to considering and accepting a contingent sale offer.
- Be prepared to field detailed questions from sellers about the expected timing of the sale of their home.
- Buyers should already have selected a real estate agent to sell their existing home, and ideally should present a listing agreement with their purchase offer package to show that their home is already on the market (or will be soon).
- If the buyers are using a different real estate agent to represent their sale than they are for their purchase, the agent representing the purchase should coordinate with the agent representing the sale so they can properly represent how well the property is being marketed to the sellers of the new home.
- At the outset, buyers should be honest about the expected time they need to sell their home, and negotiate firmly with sellers. If the other items above are organized and presented well, buyers are more likely to get their offer accepted.
What Should Sellers Know About Contingency Offers?
In a slower market with fewer buyers, a seller might be more inclined to take a contingency home sale offer, but in a busy market, a seller is in the driver’s seat. Either way, an informed seller should consider the following:
- Is the buyer’s existing home already on the market? If it is, the seller should review the listing agreement carefully to see how long it has been on the market.
- Is the property priced properly to sell in current market conditions? Based on the offer price and down payment a seller is considering from the buyer, the seller can then ask whether the proceeds for closing are coming from buyer’s savings or from the contingent sale of their home. Once the seller knows these figures, they can work with their local real estate agent to calculate the price the buyer must sell their existing home for to ensure a smooth closing on the purchase.
- The seller must consider market factors and whether comparable homes are selling for prices similar to the list price. If not, the appraisal could come up short for the buyer of that home, which could put the entire transaction at risk, which would in turn put the new purchase at risk.
- The seller must also be familiar with the condition of the home that their buyer is selling because lenders must approve home inspections and can require repairs before funding a loan—this is another factor that can delay or kill certain transactions.
Alternatives to Using a Sales Contingency
Here are two ways to buy without selling first and therefore avoid a sale contingency. Find a local lender who can advise you on these specific scenarios:
- Bridge loans: this is a loan where you get approved for an amount of money required for a down payment on a new loan, and the bridge loan is funded into the escrow of the new purchase loan. Bridge lenders require your existing home to be listed.
- Home equity loans: you can get a home equity loan or home equity line of credit on your existing home to use for the down payment. This typically requires at least 10 percent equity leftover after the combination of your first and second mortgage.
More Helpful Home Contingency Articles
Suitable Property Contingencies via Kyle Hiscock
Types of Contingency Clauses at Investopedia
Whether you are thinking of buying, selling, or buying and selling together, you should be knowledgeable about potential sale contingencies to make educated decisions and complete smooth transactions. Knowing all your options will put you in a great position to make the best decision for your situation and needs.
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