How does someone buy a new home without having first sold his or her current one? There are several options, but the most common is adding a home sale contingency clause to the buyer's offer. Here's how they work.
Many buyers will put a contingency clause in their offer, which stipulates they'll only commit to buying the new house if their current home sells.
If you're buying, this clause helps protect you from carrying two mortgages at the same time — if you don't find a buyer within a specified period of time (typically 30-60 days), the purchase agreement is voided.
That said, in competitive real estate markets, where there's a high demand among buyers for a limited amount of inventory, this kind of contingency could actually make it harder to get your offer accepted.
The simple point is that although contingencies are common in real estate contracts, they're also complicated affairs.
Whether you're trying to purchase a home contingent on selling your current one, or evaluating such an offer from an interested buyer, it's best to defer to your real estate agent's judgment on how to proceed.
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Read on to learn more about sale and settlement contingencies, as well as kick-out clauses — as well as some outside-the-box approaches that can help you make a contingency-free offer without taking on undue risk if your current home doesn't sell.
Sale and Settlement Contingency
This contingency adds the stipulation that a buyer must sell and settle his or her existing home before the purchase of the new home goes through. It is used if the buyer has not yet put her or her house on the market but wants to put in an offer on a new one.
In most cases, the seller is able to continue to market the home through an added kick-out clause, but the buyer is given first right of refusal if another offer is made. The buyer can then remove the contingency within 72 hours, or risk having the other offer accepted by the seller and losing out on the home.
Settlement Contingency
If a buyer has already listed his or her existing home, has accepted an offer and is just waiting to close, a settlement contingency may be used. Since a house doesn't officially change hands until the closing date, the sale could potentially fall apart.
The settlement contingency protects the buyer in this case. With this option, the seller is normally prohibited from continuing to market the property or accept any other offers. If the buyer's sale goes through, the contract stays valid. If it doesn't, the contract is terminated or modified.
Considerations for a Seller
If a buyer makes an offer with a home sale contingency, you'll want to work closely with your real estate agent to consider your best move. Accepting or rejecting the offer may depend on how long your home has been on the market, the average time it takes to sell a home in your area, the listing price of the buyer's home, or if his or her home is even on the market yet.
Regardless of what you decide, make sure to add time limits to any agreements - you don't want to wait around forever while your potential buyer tries to sell your home. Plus, be aware that if you do accept the contingent offer, your home may show as "under contract" on its listing, meaning other potential buyers will probably steer clear of visiting any showings. They don't want to waste their time with a property they see as already sold.
Considerations for a Buyer
A home sale contingency can give you the peace of mind by not owning two homes (including mortgage payment, utilities, etc.) at once. However, adding this contingency may make your offer less desirable to the seller. The seller may opt to accept a different offer with no strings attached or expect to be compensated for this extra headache by a higher offer amount from you.
If you're faced with needing to remove the home sale contingency and are nervous about how quickly your home will sell, there are a few options:
- Bridge Loans – Bridge loans "bridge" the gap between the purchase of a new home and sale of an old one. These can get quite expensive because of loan fees, but if you're thinking of going this route, get pre-approved before getting your 72-hour notice so you're not scrambling at the last minute.
- HELOCs – Home equity lines of credit (HELOCs) can be taken out on an existing home but not after you have put it on the market. As with a bridge loan, if this is an option for you, apply for a HELOC early (and before listing your home). If you're approved, you can transfer funds in order to purchase the new home.
- Less Down Payment – If you were going to put down the standard 20% on your new home, instead get a higher mortgage amount and pay less of a down payment. You'll keep more cash around for you to potentially pay two mortgage payments while you wait for your home to sell.
If you decide you're unable to remove the contingency and lose out of the purchase, you may lose your earnest money. Work with your real estate agent to run through the options with your specific scenario to come up with the best one.
Home sale contingencies come with their own set of rules and challenges. Since anything in a real estate sales contract is legally binding, don't do it alone. Find an experienced agent to help you navigate the complicated contracts, paperwork, and negotiations involved in the home selling or buying process, especially when dealing with a contingency clause.
If you work with a Clever Partner Agent as a seller, you could pay less in commissions. Partner Agents offer the same full service as other agents but have agreed to work for 1.5%.
As a buyer in a qualifying state, you may be eligible Clever Cash Back.
