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Most buyers (except first-time buyers) have a home to sell when they buy a new home. This can create a financial dilemma if they need the funds from their current home to buy the new house.
Rather than waiting until your current home sells and you have the money in hand, you can make an offer on the house with a home sale contingency. The contingency protects you as a buyer, but it has some downsides.
Here’s what you must know.
What Is a Home Sale Contingency?
A home sale contingency protects buyers who have a home to sell. If you need the funds from the sale of your home to close on the purchase, make the purchase of your new home contingent on the sale of your existing home.
The home sale contingency is risky for sellers, so they often continue showing the home and accept ‘kick out’ offers.
This means if the seller gets another offer while you are in your contingency period, they can accept another offer, but they must give you fair warning of the new offer and give you the chance to remove your contingency and follow through with the sale if you can.
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How Do Home Sale Contingencies Work?
A home sale contingency provides you time to market and sell your home. If you don’t sell the home within the timeframe allotted, you can back out of the contract and keep your earnest money.
You can ask for two types of home sale contingencies, of which the sale and settlement contingency is riskier for sellers.
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Types of Home Sale Contingencies
Sale and Settlement Contingency
The sale and settlement contingency means you don’t have a contract on your home yet. You are still in the marketing phase, looking for the right buyer.
With this contingency, you can back out of the contract if you can’t get a buyer under contract and settled before the contingency expires.
This is risky for sellers since it allows more time and has more moving pieces to the puzzle. It’s not just that you need the home under contract, but you also need it sold, which can take a long time.
The settlement contingency means you’ve already marketed the home and found a buyer.
You have an active contract on the house, you’re just waiting for the transaction to complete so you have the funds to buy your new home.
Home Sale Contingencies: What Do Buyers and Sellers Need to Consider?
Home sale contingencies protect buyers tremendously, but there are still risks. You must continue with the transaction as if you’re going to close on the purchase of your new home.
This means you’ll incur costs for the home inspection, home appraisal, and title work. You’ll be on the hook for all the fees even if you don’t close on the house because your existing home didn’t sell.
Sellers take a big risk accepting a home sale contingency. Before you do, consider the following:
- A sale and settlement contingency is very risky. If you aren’t sure how far along the buyer is in the process of listing and marketing their home, you could tie up your home in a dead-end. If they didn’t find a real estate agent yet or prepare the listing, chances are they won’t be able to sell the home within the contingency period.
- Many buyers won’t look at your home when it’s ‘under contract.’ Even if you advertise the house as contingent, many buyers will pass up the chance to look at your home because they know the chances of buying it are slim. This could mean you lose time and money while waiting for your contracted buyers to sell their homes.
- Know the details of the listing. If the buyer’s home is already listed, get as many details about it as possible. Is it listed for a comparable price to other sales in the area? Has it been on the market for a long time? Your real estate agent should be able to help you get these answers.
Are Home Sale Contingencies Risky for Sellers?
Home sale contingencies are risky for sellers for several reasons:
- You’re at the mercy of the buyer selling their home in time to settle your contract
- You take the home off the market during the contingency unless you have a kick-out clause
- You’re trusting that the buyer is doing everything they can to sell their home
But, sometimes, a home sale contingency is a good idea for sellers, especially if you’re home has been on the market for a while.
If you have trouble finding buyers, you may be more willing to accept the contingency and hope for the best.
Keeping a kick-out clause in the contract gives you the backup you need should another offer come through.
Are Home Sale Contingencies Worth It?
A home sale contingency can be worth it in the right situation, but it has its risks for buyers and sellers.
At first glance, buyers seem to make out on the deal, but a seller may back off when you add a home sale contingency to an offer.
Many sellers don’t want the risk of a home sale contingency on the contract and would rather wait for a better offer.
But a home sale contingency can give buyers the reassurance they need to buy the home, risking nothing.
If they can’t sell their home, they can back out and won’t lose anything except any closing costs they paid upfront to move forward with the transaction.
Home Inspection Contingency vs. Home Sale Contingency
A home inspection contingency is another popular option. This protects buyers from buying a home that’s in complete disrepair.
The home inspection contingency gives buyers time to pay for and review the home inspection report to determine its condition and if they should move forward with the sale.
The home inspection contingency is independent of a home sale contingency since the home sale contingency pertains to the buyer’s existing home, not the home they might buy.
Appraisal Contingency vs. Home Sale Contingency
An appraisal contingencyprotects buyers from buying a home that’s worth less than they offered. If a home isn’t worth enough, the lender won’t approve financing.
Even if the buyer has the money to make up the difference between the sales price and appraised value, they’d enter the investment ‘upside down’ or paying more for a property than it’s worth.
It could take years to make up the equity, which isn’t the best investment decision.
How Common Are Home Sale Contingencies?
A home sale contingency is quite common. Sellers are more likely to accept a settlement contingency vs. a sale and settlement contingency, though.
If you’re buying in a seller’s market, you want to minimize your contingencies, so waiting until you at least have a contract on your home is best.
When Do Home Sale Contingencies Make Sense?
Home sale contingencies make sense when you can’t afford to buy a home without selling your home first.
If you’re ‘upgrading,’ you likely need the funds from your existing home to cover the down payment and closing costs.
Even if you have the cash to put down, you may not be able to afford two mortgages if your existing home doesn’t sell in time. A home sale contingency protects you from these situations.
Bottom Line: What Is a Home Sale Contingency?
A home sale contingency protects buyers and sellers. Buyers can back out of a contract if their home doesn’t sell, so they aren’t stuck with two mortgages.
Sellers aren’t stuck in a sales contract indefinitely, waiting for the buyer to have the funds to settle.
If the buyer can’t remove their contingency by the expiration date, the seller can cancel the sale and find new buyers.