A home sale contingency is one type of contingency clause frequently included in a real estate sales contract (or an offer to purchase real estate). With a home sale contingency in place, the transaction is dependent (or contingent) upon the sale of the buyer’s home. If the buyer’s house sells by the specified date, the contract moves forward; if it doesn’t sell by the specified date, the contract is terminated. Here, we take a look at what buyers and sellers need to know about home sale contingencies.
Two Types of Home Sale Contingencies
There are two types of home sale contingencies:
- Sale and Settlement Contingency
- Settlement Contingency
As the name implies, a sale and settlement contingency is dependent upon the buyer selling and settling an existing home. This type of contingency is used if the buyer has not yet received and accepted an offer to purchase on the current home. In general, this type of contingency allows a seller to continue to market the home to other potential buyers, with the stipulation that the buyer will be given the opportunity to remove the sale and settlement contingency within a specified time period (typically 24-48 hours) if the seller receives another offer. If the buyer cannot remove the contingency, the contract is terminated, the seller can accept the other offer and the earnest money deposit is returned to the buyer.
A settlement contingency, on the other hand, is used if the buyer has already marketed his or her property, has a contract in hand and a settlement date on the calendar. Because the property isn’t truly sold until the settlement (or closing) takes place, this protects the buyer if the sale falls through for any reason. In most cases, this type of contingency prohibits the seller from accepting other offers on the property for a specified period of time. If the buyer’s home closes by the specified date, the contract remains valid. If the home does not close, the contract can be terminated.
Considerations for Buyers
Most buyers need to sell their existing home to purchase a new one, especially when "trading up" to a more expensive house. A home sale contingency gives buyers the time they need to sell and settle before committing to a new home. Buyers can avoid owning two homes and holding two mortgages at one time while waiting for their own home to sell. A home sale contingency can also make for a seamless transaction: the buyer can sell one home and move into the next since the new home is already “locked in.”
Even though a home sale contingency helps bring peace of mind to the buyer, it doesn't avoid other costs of home buying. Buyers must still spend money on home inspections, bank fees and appraisal fees, and these expenses are not refunded if the deal falls through due to the property not selling on time. In addition, the buyers will likely have to pay more for the property than if they made an offer without the home sale contingency. This is because they are essentially asking the seller to “gamble” on their ability to sell their current home and the seller will expect to be compensated for this risk.
Considerations for Sellers
A home sale contingency can be risky to sellers, because there is no guarantee that the home will sell. Even if the contract allows the seller to continue to market the property and accept offers, the house may be listed “under contract,” making it less attractive to other potential buyers. Many people looking for homes will steer clear of a property that is under contract, because they don’t want to waste time and risk falling in love with a property they may never have the chance to buy.
Before agreeing to a home sale contingency, the seller (or the seller’s real estate agent) should investigate the potential buyer’s current home to determine:
- If the home is already on the market. If not, this is usually a red flag because it indicates the potential buyer is just thinking about buying and selling at this point.
- If it listed at the correct price. A real estate agent can prepare comparables to make sure the house is priced to sell.
- How long it has been on the market. If it’s been a long time, the home may be priced too high, the showing procedure may be difficult or the market could just be dry.
- The average time on the market for homes in the neighborhood. If the average time is 30 days or so, one could expect the home to sell. If it’s 90 days or more, the seller could be waiting with little chance that the buyer’s home will sell.
A home sale contingency, however, might be a good thing if the seller’s property has been on the market a while. If the seller has had trouble finding a buyer, a contract with a contingency is still a contract, and there is a chance that the property will sell. In many cases, it is advisable to limit the amount of time the buyer has to sell his or her home to one to four weeks. This puts pressure on the buyer to lower the asking price and make a sale while preventing the seller from losing too much time in the event that the transaction does not close.
A seller can include a “kick-out clause” to provide a measure of protection against a home sale contingency. A kick-out clause states that the seller can continue to market the property and accept offers from other buyers. In this case, the seller gives the current buyer a specified amount of time (such as 72 hours) to remove the home sale contingency and continue with the contract. If the buyer does not remove the contingency, the seller can back out of the contract and sell to the new buyer.
The Bottom Line
Home sale contingencies protect buyers who want to sell one home before purchasing another. The exact details of any contingency must be specified in the real estate sales contract. Because contracts are legally binding, it is important to review and understand the terms of a home sale contingency. A qualified real estate professional or real estate attorney should be consulted with any questions or concerns regarding real estate contracts and home sale contingency clauses.
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