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.

Related Articles
  1. Home & Auto

    Moving Up: Dream House Or Money Pit?

    If you are upgrading your home, here are some things you'll need to know so you don't spend more money than you need to.
  2. Home & Auto

    Contingency Clauses In Home Purchase Contracts

    Here, we introduce widely used contingency clauses in home purchase contracts and how they can benefit both Buyers and Sellers.
  3. Home & Auto

    Is Foreclosure Ever a Good Idea?

    Foreclosing on a home has major ramifications that can last for years, but for some, foreclosure may seem like the only option.
  4. Personal Finance

    DIY! How To Sell Your House Without A Broker

    Thanks to social media sites like Pinterest, people are showing their enthusiasm for DIY, or do-it-yourself projects to save money -- and selling your home shouldn't be any different.
  5. Home & Auto

    6 Tips For Selling Your Home Fast

    Find out what you can do to stand out from the competition and make your home an easy sell.
  6. Home & Auto

    The Complete Guide To Real Estate Renting

    Everything you need to know about renting property.
  7. Professionals

    Illiquid Real Estate: Correlation Pros and Cons

    Stock and bond markets are moving more closely in tandem with each other. Is illiquid real estate the vaccine for this correlation?
  8. Retirement

    5 Ways to Use Your Home to Retire

    Retirement is going to cost a lot, and for homeowners who face a shortfall, their home can be a source of income. From downsizing to renting, here's how.
  9. Home & Auto

    5 Luxurious Ways to Boost Your Home's Resale Value

    Not all renovations are created equal. Here are five that are most likely to make a property appreciate (and be appreciated by househunters).
  10. Personal Finance

    Choosing An In-Home Safe: Features To Look For

    What to look for in a box to protect your irreplaceable belongings.
  1. Does the bank set up an escrow account for the buyer and seller in a home sale?

    An escrow service, rather than a bank, typically sets up an escrow account for the buyer and seller in the sale of a home. ... Read Full Answer >>
  2. Can I borrow from my annuity to put a down payment on a house?

    You can borrow from your annuity to put a down payment on a house, but be prepared to pay an assortment of fees and penalties. ... Read Full Answer >>
  3. Can I take my 401(k) to buy a house?

    Once you reach 59.5, you can use the funds in your 401(k) retirement savings account to buy a house or any other expense ... Read Full Answer >>
  4. Can I take my 401(k) to buy a house for my children?

    Under the standard regulations for 401(k) retirement savings plans, you may elect to withdraw funds from your 401(k) for ... Read Full Answer >>
  5. How is market value determined in the real estate market?

    Anyone who has ever tried to purchase or sell a home has probably heard a lot about the property's fair market value, or ... Read Full Answer >>
  6. What is the difference between adjusted and regular funds from operations?

    While regular funds from operations measures the cash flow generated by the operations of a real estate investment trust ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!