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Buying a home can be a risky transaction. After all, your hard-earned money is being invested. That’s why you need protection if God forbid something goes wrong. In case you want to buy a house prior to selling your current one, you’ll need a home sale contingency clause in your real estate agreement.
A home sale contingency can protect both the buyer and the seller. The former more than the latter. Let’s find out how.
What’s a home sale contingency?
A home sale contingency is an important part of the sales contract whereby the transaction is dependent upon the successful sale of the buyer’s existing home. The contract mentions that the deal will go ahead only if the buyer’s home sells by a specified date. If it doesn’t, the contract can either extend with the consent of both parties or be terminated by the seller.
Once the buyer and the seller agree to the terms of the contract and sign it, a contingency clause is binding in a real estate contract.
Common types of home sale contingencies
There are two main types of home sale contingencies. These are sale and settlement contingency and settlement contingency. Let’s explore both in more detail.
Sale and settlement contingency
A sale and settlement contingency requires the buyer to sell their home first. If the buyer has not yet received and accepted an offer to buy their current house, a sale and settlement contingency clause comes into play. In general, this type of contingency allows a seller to continue marketing the home to other potential buyers with the condition that if the seller receives another offer, the buyer will be allowed to remove the sale and settlement contingency within a specified timeframe (typically 24-48 hours).
If they’re unable to, the contract is dissolved, the seller is free to accept another offer, and the buyer’s earnest money deposit is returned.
This type of contingency comes into play if the home buyer already has a contract in hand with a scheduled closing date. It protects the buyer if the sale falls through for any reason. If the buyer’s house deal closes by the specified date, the sale contract remains valid. Otherwise, it can be terminated.
Furthermore, a typical settlement contingency clause would also prohibit the seller from accepting other offers for a defined length of time.
How does a home sale contingency work?
If you’re looking to buy a second house before selling off your existing house, do ask your real estate agent to add a contingency clause to the terms of the offer. It will protect you before your home sells.
Keep in mind that buyers without a home sale contingency in their offer may have to pay more for a property. The seller is basically taking a chance that the buyer will be able to sell their current house. Therefore, the home seller will expect extra compensation for this risk.
If a contingent offer is not met, the sale contract is deemed void, and the seller can move on to a backup offer. A home sale contingency saves both parties from unforeseen circumstances within the real estate transaction.
Let’s take an example of a home sale contingency.
A seller offers a particular purchase price and you, as the buyer, want to go ahead with a contingent real estate contract – provided a home inspection justifies the pricing. If the home inspection reveals that the roof has only five years left while the offer mentioned a roof life of 15 years, there can be many scenarios: the property seller may agree to repair the roof, decrease the sale price, or the potential home buyer may decide to cancel the contract. The contingency clause allows them to do so without worrying about penalties.
What is the course of action in a contingent home sale?
If you have a contingency clause, your home sale could follow any of the paths mentioned below.
- You find a buyer for your existing house and go ahead with your contract for the new home.
- In case you’re unable to find a home buyer in the specified timeframe, your contract for buying the new house will terminate. However, you’ll get back your earnest money.
- If your contract has a “kick-out clause”, another buyer can make an offer on the house. Such a clause allows a seller to keep their home on the real estate market while you sell your house. In case they find a new buyer, they’ll have to give you 72 hours of notice. You can either purchase the home or drop out of the deal.
Contingency clause if you’re a homebuyer
The logic behind a contingency clause is simple. A buyer must sell their current house in order to purchase a new one, especially if the second one is more expensive. A house sale contingency allows buyers the time they need to sell their home and close on a new one. What’s more, the buyer can avoid owning two properties and having two home mortgages at the same time. It will give them peace of mind knowing that they can always back out of the deal if something goes wrong.
However, keep in mind that the buyer will still have to pay the home buying cost, home inspection cost, bank fees, and appraisal fees.
Contingency clause if you’re a home seller
The clause is less beneficial for sellers as it offers no guarantee that the real estate will sell. They may be able to continue marketing the property and accept offers but such an “under contract,” property is less attractive to potential buyers who may not want to waste their time and effort on a house that may not be theirs in the end.
However, a home sale contingency might be advantageous for a seller whose property has no buyers despite being on the market for a while. A contingency contract will increase the property’s chance to sell.
As a buyer, you’d want to protect yourself against the unexpected. After all, there’s too much at stake – the huge amount of money, uncertainties, the size of the acquisition, and the agreement of both parties. A property transaction with a home sale contingency allows home buyers to back out if something goes wrong as the deal progresses.
- A home sale contingency can financially and legally protect home buyers who’re looking to sell one house before buying another.
- If the buyer’s house sells by a specified date, the sale contract moves ahead as planned. Otherwise, it will terminate.
- The buyer can walk away easily with their earnest money.