There are many different types of contingencies in real estate transactions, but one of the most common types is a home sale contingency.
As the name implies, a home sale contingency stipulates that a buyer’s current home must sell in order for the transaction to buy a new home to move forward.
These contingencies include dates by which the buyer’s current home must sell. If the home is sold by that date, the contract on the new home can go ahead. If, however, the buyer’s current home does not sell, the transaction is nullified.
Types of Home Sale Contingencies
One kind of home sale contingency is the sale and settlement contingency, which is used if the buyer has not yet accepted an offer on their current home.
Typically, this kind of contingency gives the seller the right to continue marketing their property, even though the property is under contract.
The catch is that the buyer has the right to remove the sale and settlement contingency within a certain amount of time, which is generally 72 hours or 3 business days, should the seller get another offer on the property.
If the buyer is unable to remove the contingency, their contract to purchase the home is voided and the seller is then free to accept another offer on the property.
Another type of home sale contingency is the settlement contingency.
This type of contingency is put in place if the buyer’s current home is already under contract and a closing date has been set.
Because a property doesn’t truly sell until the closing date (or settlement date), this contingency protects the buyer in the event that the sale of their current home does not go through.
Typically speaking, a settlement contingency prevents the seller from accepting any other offers on the property for a pre-determined period of time. If the buyer’s current home closes by that date, the contract is enforceable and valid. If not, the contract can be voided. However, that is not always the case because this type of contingency sometimes will still have a kick-out clause.
What Home Sale Contingencies Mean for Buyers
Since most of us need to sell our current homes in order to afford a new one, these types of contingencies give buyers time needed to market, sell, and close on their current home without having to commit to buying a new home.
This enables buyers to avoid carrying two mortgages at the same time while also making for a much smoother process of moving. That is, buyers can sell their current home and move into their new home with the knowledge that their current home is locked into a contract.
It’s important to remember that these contingencies protect buyers from owning two homes at once, but they don’t protect you against expenses related to home buying, like appraisal fees and bank fees. These types of expenses are not refundable if the contract is terminated, so you could still lose some money.
What Home Sale Contingencies Mean for Sellers
There is some risk involved for a seller in a home sale contingency because sellers have no guarantee that the buyer’s current home will sell.
Likewise, when a home is under contract, it’s usually has to be disclosed as such. When a home is under contract, other potential buyers might avoid the property knowing that it is already likely to sell.
Part of the process of agreeing to a home sale contingency as a seller is thoroughly examining the buyer’s current home. This is typically done by the seller’s agent, and involves a look at several criteria.
First, your Realtor should find out if the buyer’s home is already on the market. If it is, great! If not, it could be an indication that the buyer hasn’t totally committed to selling.
Second, it should be determined if the buyer’s home is listed at a price that’s supported by the market. Your Realtor can determine this by comparing the property to comparable properties that have recently sold. If the buyer or buyer’s agent isn’t willing to disclose this information on a home that isn’t yet on the market, it is virtually impossible for the seller and seller’s agent to gauge if the contingency is a fair risk for the seller and could make a seller hesitate to work with that buyer.
Third, it should be determined how long the buyer’s home has been on the market. If it has sat on the market for a long period of time, the home could be priced too high or it could be an indication that the market has slowed down.
Lastly, your Realtor should calculate the average time on market for homes in the area. This gives you a reasonable expectation of how long it might take the buyer’s home to sell.
Home sale contingencies can be a blessing for sellers, too, particularly if the seller’s property has been for sale for some time. Think of it this way – if a seller’s property has been on the market for a while, putting it under contract, even with a contingency, is still better than no contract at all.
Sellers can also add what’s called a “kick-out clause” to protect themselves against a home sale contingency.
Basically, a kick-out clause says that the seller can keep marketing their property and accept offers from other buyers. That being the case, the seller stipulates a timeframe (i.e., 72 hours) for the home sale contingency to be removed. If the buyer doesn’t remove the contingency, the seller and buyer are released from the contract and the seller is allowed to sell their home to a different buyer.
Final Thoughts
Home sale contingencies are a means to protect buyers that need to sell one home to purchase another. These contingencies are highly detailed and are included in the real estate contract, which means the contingency is a legally binding agreement.
As such, it’s necessary for the parties involved to carefully review the terms of the contingency. This is where your Realtor comes in!
Realtors are qualified to manage these complex transactions and will work for your best interests. It’s just one of the many services that Realtors provide to their clients that make the process of buying or selling a home a much smoother and less stressful process.