How Does Home Sale Contingency Work?

Buying and selling a home can be an exciting event, but also, a very stressful event. When it comes time to move and sell or buy a new home, knowing the ins and outs of real estate contracts can be extremely important, especially when it comes to clauses that can impede fulfilling the contract, and ultimately, losing the sale or purchase of a home. One term often seen and used in a home sales contract is the, ‘contingency’ clause. Contingencies for the selling of a home has a specific meaning, and you might be wondering, how does home sale contingency work? We’ll explain, so keep reading.

When a buyer currently owns a home

If you plan to move, that means you need to get rid of one home and find another. Most people start home shopping when they put their own home up for sale in hopes of having their current home get under contract at the same time they find their next ‘home-of-their-dreams,’ and get under contract with it. In a perfect real estate world, everything would fall into place for everyone under these set of circumstances, and it’s a situation that happens quite often in the business. Most buyers have to get out from under their current home so they are able to afford to purchase a new home due to the fact that they cannot afford the financial restraint of holding two mortgages, not to mention, most home buyers need to use the money they get from the sale of their current home, towards the purchase of their new home. So, how does it work when you find your next dream home, but have a home you are trying to sell first?

Writing a contract with a contingency clause

If a buyer makes an offer but have a home they currently own and need to sell in order to complete the transaction, according to Investopedia, a real estate contract can be written up with a contingency clause that states that the buyer’s offer price is accepted and the sell is contingent upon the sell of the buyer’s current home. A date that the sell must happen by, is typically listed, and once that requirement is met, the contract can move forward with the purchase of the new home. If the buyer’s home does not sell by the date that’s agreed upon, at that point, the purchase contract becomes null and void and the sellers are no longer bound to sell their home to the buyers.

Who does the contingency protect?

Buyers know the last thing they want is to get trapped in having to come up with the down payment, closing costs, attorney’s fees, etc., on a new home when they haven’t even sold their current home, so protecting themselves against having to move forward with the purchase of a second home just in case, is important. And that is exactly what the home sale contingency does; it protects the buyer by giving them a way out of the contract, according to SWR. Of course, it depends on how the contingency is drawn up as to how free-and-clear the buyer walks away, but most buyers request they receive their earnest money back and there are no penalties assessed.

Can a seller continue looking for a buyer under a contingency contract?

Sellers may decide to accept a buyer’s contingency contract offer, however, depending on the situation, they may request that they be able to keep their home listed on the market in search of other offers, in case the buyer is unable to sell their home by the agreed date. Under this agreement, a seller may add to the contingency that should they find another buyer who can close without a contingency to sell their home first, the buyers will be notified and will have the option of removing the contingency, meaning that they will get ‘first right of refusal.’ If they can make the deal work, which buyers are typically given a 72 hour period to try, they will have first rights to the purchase of the home, however, if they have no way of making good on the purchase despite them not being able to sell their home first, the contract becomes void and the seller can move forward with the next buyers.

Things to consider

Before a seller accepts a contingency offer, their realtor should do some research to make sure there is reason to believe the buyer will be able to move forward with the contract under a contingency. According to Max RE Exposure, here are a few things the realtor should look for:

• Is the buyer’s home actively listed on the market?
• Is the home appropriately priced to sell?
• Is the seller trying to sell during a buyer’s or seller’s market?
• Is the home in, overall, good selling condition?
• Has there been good activity with the listing already?
• Is it being marketed appropriately to drive traffic to the home?

The more the sellers know about the buyer’s property before accepting a contingency contract, the better and more well-informed decision the sellers can make. Many contingency deals can work out just fine, just as long as the right research and the right risk-prevention measures are taken to protect both parties in the ways they each need to be protected.