A few common questions real estate agents get are “What is a home sale contingency?” or “How does a home sale contingency work.”
How a home sale contingency works is a topic that all real estate buyers and sellers should be educated about.
It is one of many common contingencies that are possible to encounter in real estate.
If you are selling a home, you may encounter a buyer who tries to purchase your home with a sale of home contingency.
In other words, buyers write into the real estate contract that they will not have to proceed with buying your home unless they successfully sell the house that they currently own.
It is a type of contingency most sellers want to avoid.
Accepting this kind of contingency 99% of the time is a big gamble and probably a huge mistake!
In thirty-eight years of selling Real Estate in Massachusetts, I can not remember telling a client that this would be an intelligent decision.
Making this kind of recommendation to one of my seller clients does not make much sense.
To be clear, my advice on this subject would not change based on the Real Estate market.
It could be a seller’s, buyer’s, or neutral Real Estate market, but that does not change the appeal of a home sale contingency clause.
Having this condition is not desirable when you put a home under contract. Let’s carefully examine everything you should know.
What is a House Sale Contingency?
A contingency home sale stipulates that the contract can be terminated if the buyer doesn’t sell the property before a specified date. Therefore, the purchase agreement depends on the buyer selling their current home. If the buyer’s current home is sold, purchasing the new house can proceed.
However, the buyer (or seller) can withdraw if it is not sold.
Since it is a contingency in the contract, the buyer could get their earnest money returned to them. The seller would have wasted time, money, and effort.
From experience as a Realtor for the past three decades, I must point out how risky this clause is for a home seller. If you agree to this contract condition, it is possible you could end up with your home back on the market months later. It adds a distinct level of uncertainty to the transaction.
Buying and Selling a Home Simultaneously
It is expected to see a home sale contingency when someone is trying to buy and sell a home simultaneously. The protective buyer is looking to find a new house before attempting to sell their existing property.
Most people do this because they fear putting their homes on the market, selling immediately, and having nowhere to go. Instead, they reverse the order and try to purchase a home first by having a contingency contract.
Many potential buyers have no idea doing it this way will lead to failure. Most sellers will not consider a home sale contingency for many reasons we’ll discuss.
Home Sale Contingency Example
Here is a sample language of a home sale contingency clause in a real estate transaction.
This offer is contingent upon the buyer selling their current property located at (Address) within X days from accepting this offer or any extensions signed by the buyer and seller.
At their option, the buyer may waive the home sale contingency in writing before the expiration of the contingency period. If the buyer cannot sell their home during the contingency or extension period, the buyer and seller agree to sign a mutual release terminating the purchase agreement.
The seller and buyer authorize the real estate broker to return any earnest money deposit to the buyer.
The Downsides of a Home Sale Contingency
An offer contingent on another home selling means one thing – YOU LOSE CONTROL OF THE PROCESS!! With no guarantees of anything.
Don’t be lured into thinking this arrangement is sound if a buyer woos you with a full-price offer, either. If you never make it to the closing table, what difference does it make what the price offered ends up being?
Considerations For Home Sellers
- How do you know if the contingent home is priced correctly or not?
- What if the property is not priced correctly and the seller doesn’t adjust its price accordingly?
- What if the house has problems uncovered at a home inspection that can not be resolved?
- Will you be pleased if their buyer does not get financing and you have had your home off the market patiently waiting?
Is the picture starting to come into focus on why a contingency home sale is not a sound business practice? When you agree to accept a home sale contingency, your home is off the market, and you are at the mercy of the contingent home selling.
When I am hired as a listing agent, my fiduciary responsibility is to offer the best advice possible to my seller client. It would be counterintuitive for me to tell my seller that they should accept a home sale contingency.
What is a Kick-Out Clause?
Any seller accepting a home sale contingency should also consider a kick-out clause. The kick-out clause relieves a seller from being tied into a house sale contingency agreement.
A kick-out clause gives a home seller the right to continue marketing their property. If another potential buyer comes along, the original buyer has a specific amount of time to remove the home sale contingency.
As a seller, you want this time to be as short as possible. No more than 24 hours would be a reasonable time frame. Extending the period could result in losing the ready, willing, and able buyer to move forward.
If the original buyer doesn’t remove their home sale contingency, the seller can back out of the contract and proceed with the new buyer. The kick-out clause is like a compromise between accepting a contingency contract or not.
Some would argue that having a kick-out clause clouds the waters. Some buyers don’t want to wait when they need to lock up a new house to purchase.
Are There Any Advantages to a Home Sale Contingency?
There is only one circumstance where I could, in good conscience, advise my seller clients to accept a home sale contingency.
If the property I was marketing was highly challenging to sell for one reason or another and the person making the contingent offer had a far more salable property, I would possibly guide my seller client into considering a contingent sale.
For example, let’s say the home I was marketing had some form of Real Estate functional obsolescence that made it an overly tricky home to sell.
In addition, the contingent home happens to be located in a highly desirable area of town and is in super condition. The only obstacle in this scenario is guaranteeing that the contingent home would be appropriately priced.
If these conditions were met, then it would be something the seller could consider as long as they were getting an excellent offer on their home.
Is The Real Estate Agent Going to Be Successful in Listing The Buyer’s House?
The part that becomes challenging with a home sale contingency is that you are now relying on another Realtor or real estate agent you did not hire and don’t know anything about to make this transaction happen.
The buyer’s agent might specialize in working with buyers and doesn’t do much business with listing and selling homes.
Given that I have been in the business for so long, I can tell you there are some excellent Realtors and some who should not be in this field. Here are some key Realtor interview questions you may want to answer as part of your decision-making process.
Knowing the skill level and experience could become a key consideration in whether you want to put your home sale success in the hands of this agent.
The picture now should clear that home sale contingencies for most home sellers are not advisable.
What About a Real Estate “Right of 1st Refusal” Instead?
On several occasions, after being rebuffed on a home sale contingency, the buyer’s agent tried to get a right of 1st refusal for their buyer client instead.
The first right of refusal is similar to a kick-out clause but different.
Many Realtors do not even understand what a right of 1st refusal is!
When you allow a buyer who can’t purchase a home without selling their own home (contingent sale) to have a right of 1st refusal, you are doing your seller client a huge disservice.
When I am marketing a home and a legitimate buyer comes along who wants to buy, the last thing I want to do is cloud the negotiations by telling them we must wait 24-48 hours (the typical amount of time) to give another buyer their “right of 1st refusal”.
Why would I be legally bound to contact another buyer who doesn’t qualify to purchase the home without selling their property first to ask them if they would like to exercise their right of first refusal?
Doing so is a pointless waste of time! I have found that some Realtors advise their clients that this arrangement is acceptable because they are naive or because it gives them a slight sense of accomplishment even though they have accomplished nothing.
Allowing a buyer who doesn’t qualify to purchase without selling a home the right of 1st refusal could cause the seller to end up with nothing if a buyer with nothing to sell walks away out of frustration.
You Could Get Stuck With a Buyer You Don’t Want
Another scenario to consider is what happens if the buyer exercises their “right of 1st refusal”? You could add language to the contract that says this buyer would forfeit their deposit if they did not close as stipulated.
However, is it worth losing a buyer who could have bought the property without this mess?
Is keeping this buyer’s deposit enough to mitigate a buyer who was ready, willing, and able to close? My answer would be NO, especially if it weren’t a competitive market and values were declining.
The only scenario where it could make sense to accept a right of 1st refusal is if the buyer did not have a home to sell and could step forward to buy right away if the seller required them to do so.
The Right of First Refusal Might Make You Feel Good
When you come down to it, how does a right of 1st refusal benefit a seller other than making them feel good a potential buyer has some interest?
The point of this is that the buyer more than likely isn’t in a position to buy. When they can purchase, they can always come back at that point anyway!
Other Vital Real Estate Contingencies to Know
The following are some of the most common contingencies in a real estate contract.
Whether you’re a buyer or seller, it’s vital to understand them. They are among many essential real estate terms to know.
Appraisal Contingency
One common condition in some real estate contracts is a home appraisal. Specific appraisal contingency language will say the home must appraise for the purchase price or higher.
If the appraised value is less than the sales price, the buyer can terminate the agreement or renegotiate the price.
The appraisal contingency is often removed in hot markets that favor the seller.
In fact, with so many bidding wars on homes taking place to get an accepted offer, buyers are being forced to add an appraisal gap clause. An appraisal gap guarantee says that the buyer will agree to make up the difference if the appraisal comes in less than the sale price.
These clauses become far more common in a seller’s market.
Home Inspection Contingency
The home inspection contingency will allow the buyer a certain amount of time to have the property inspected by a professional home inspector.
The buyer may terminate the contract if significant structural or mechanical defects are found during this contingency period. The home inspector will provide a detailed inspection report that showcases their findings.
The home inspection is part of the due diligence period during which the buyer can discover the property’s history.
Financing Contingency
Unless the buyer makes a cash offer on the house, there will be a mortgage contingency period. During that time, the buyer will attempt to procure financing for a certain percentage of the home’s purchase price.
While standard, the loan contingency is one of the most prolonged periods for home sellers to wait for. For this reason, sellers prefer a non-contingent offer without a mortgage contingency.
When a buyer cannot get a mortgage, they can get their escrow funds back. Unfortunately, the seller has wasted a ton of time.
Title Search
Every real estate contract has built-in language that says the home must be free and clear of title defects. A title search will be conducted by a specific title company or the attorney involved in the transaction.
With a home purchase, buyers can purchase title insurance if a title defect is discovered after closing.
Real estate agents will typically make the home contingent in the MLS until all of these contingencies are satisfied. When all the contingencies are passed, the home will become pending.
How Can a Buyer Make a Sale of Home Contingency More Appealing?
Some sellers won’t agree to this clause regardless of the other terms. However, here are some suggestions to increase your odds of acceptance.
- Make your offer over the asking price.
- Give the seller the exact closing date they prefer.
- Remove other common contingencies like the home inspection or appraisal.
- Offer a higher earnest money deposit and make part or all of it non-refundable if you don’t sell.
- Keep the window needed to sell your house tight. The shorter, the better.
- If the seller needs to stay in the house for some time after the closing, let them.
Pros and Cons For Buyers and Sellers
While you can see I am against a sale of a home contingency clause in most circumstances, I think it’s essential to provide you with the upsides and downsides, whether a buyer or seller.
For Buyers
Pros
- Risk Mitigation: Buyers are protected from owning two homes and carrying two mortgages if they cannot sell their home. It is understandable why a buyer would like this clause. Considering the drawbacks, it is impossible to get a seller to accept it in most circumstances.
- Security: You can secure your next home, which prevents you from becoming homeless if your current home sells quickly.
- Deposit Safety: There is no risk to the buyer’s deposit if they cannot sell their house. Your earnest money deposit will be returned.
Cons
- Additional Costs: Buyers must move forward and pay for home inspections, bank, and appraisal fees. If the deal falls apart, you will not get this money back.
- Potential for Higher Costs: Many sellers insist on a higher price to compensate for the added risk of accepting the clause.
- Competitive Disadvantage: In multiple-offer situations, the chance of a buyer winning the bid decreases substantially. You are unlikely to get a seller or their real estate agent to take a sale-of-home contingency when other offers are on the table.
For Sellers
Pros
- Potential for Offers: In slower markets or properties that have been listed for a while, getting a home sale contingent offer might be better than no offer.
- Continued Marketing: With a kick-out clause, sellers can continue to market their property and accept other offers. It provides them with a small safety net.
Cons
- Uncertainty in the transaction: There’s no guarantee the buyer’s home will sell. This creates uncertainty and potentially delays the sale.
- Lost Opportunities: Accepting a home sale contingent offer means a seller could miss out on other non-contingent or better offers. I always bring this up when there is a contingency home sale clause, and owners need to know this.
Sellers must weigh the potential for a slower sale against the benefits of receiving an offer, and buyers must consider the financial and competitive implications of making a contingent offer.
Both parties must consult with their agents and understand the local market conditions. Is there an appetite for this clause, or are you barking up the wrong tree?
Final Thoughts
If you don’t want to lose control of the home sale process, avoid contingent sales and the right of 1st refusals. If your home is not selling, you can always reduce the price to attract more buyers and sell the property expeditiously.
Hopefully, you now clearly understand how home sale contingencies work and whether or not they would make sense in your particular situation.
About the Author: Bill Gassett, a nationally recognized leader in his field, provided information on how home sale contingencies work. He is an expert in mortgages, financing, moving, home improvement, and general real estate.
Learn more about Bill Gassett and the publications in which he has been featured. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of Metrowest towns for the last 38+ years.
Are you thinking of selling your home? I am passionate about real estate and love sharing my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.
