In most real estate transactions, a buyer has to sell their current home in order to afford their new home. That’s where a home sale contingency can come into play!
With a home sale contingency in place as part of the sales contract, the transaction is contingent upon the successful sale and settlement of the buyer’s current home. If the buyer’s home sells by the specified date, the contract moves forward. If the home doesn’t sell by the appointed date, the contract can either be extended (if both parties agree) or be terminated by the seller.
WHAT IS THE HOME SALE CONTINGENCY?
After making a down payment on a property, a borrower can apply for a mortgage using delayed financing. When you buy a house using deferred financing, you pay cash up front and then rapidly refinance the property with the money you saved. As a result, you get to keep a substantial chunk of the money you spent on your house, which you may put to better use.
There are two categories of home sale contingency: sale and settlement contingency and settlement contingency:
Buyers will use a home settlement contingency if their home is already under contract and the home inspection contingency is removed. This contingency protects the buyer if the sale on their home falls through for some reason (for example, their buyer’s financing falls through). Under the settlement contingency, there is no kick-out clause. The seller cannot continue to market the property for sale. A new buyer cannot “kick out” the current buyer from the contract. This contingency is more common, and more likely to be accepted by the seller.
The sale and settlement contingency is a bit harder to swing. It is dependent on the buyer settling on their existing home – just like the above contingency – but ALSO successfully getting their home under contract. With this type of contingency, the “kick out” option is in place, in other words, the seller can continue to actively market the home. A new buyer CAN kick the original buyer out of the contract. If another offer comes in on the property, the seller must give the contingent buyer notice of the new offer. The buyer then has a specified time period to remove the sale and settlement contingency or the original contract is “kicked out,” or terminated.
What does this mean for you?
IF YOU ARE A BUYER
In a competitive market, it is very hard to win if there are multiple offers on the home and you are coming in with a contingent offer of either scenario. Sellers view a home sale contingency as an inherently risky option because there’s no guarantee that your home will sell or that you will successfully make it to closing.
If the home you are writing on has been on the market for a while or is at a higher price point, the chances of the seller accepting the home sale and settlement contingency are better.
When the sellers do agree to accept your contingent offer, their agent will want to speak to your listing agent and review your home’s pricing.
Settlement contingencies are seen as more acceptable by sellers than sale and settlement contingencies.
IF YOU ARE A SELLER
- the strength of the offer otherwise (price, financing, appraisal and home inspection contingencies)
- how long your home has been on the market
- if any other offers come are in hand or likely to come in
- the pricing, location, and condition of the buyer’s current home
- if the buyers house is already on the market. If not, how quickly they can get it on the market. If it is, why it hasn’t sold?
- the real estate market in the buyer’s current area
If you are selling your home and receive an offer with a home sale contingency, look at the following factors:
Reviewing a contingent offer is one of the many reasons you want to choose a trusted and seasoned Realtor to have in your corner. Your agent will reach out to the buyer’s listing agent and review all of this information to determine if the buyer’s home is likely to sell within the specified period.
Your agent will advise you on accepting this offer or not, adding the kickout clause, etc.
Your home will remain in MLS and your agent will continue to actively market it as though nothing has changed.