What to Know About a Home Sale Contingency
A few common questions that 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 home sale 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-five years of selling Real Estate in Massachusetts, I can not ever remember telling a client that this would be an intelligent thing to do.
The thought of making this kind of recommendation to one of my seller clients does not make a whole lot of 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.
Buying and Selling a Home Simultaneously
It is most common to see a home sale contingency when someone is trying to buy and sell a home at the same time. The protective buyer is looking to find a new home before attempting to sell their existing property.
Most people do this because of the fear of 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 often have no idea doing it this way will lead to failure. Most sellers will not consider a home sale contingency for many of the reasons we’ll discuss.
Home Sale Contingency Example
Here is a home sale contingency clause sample language in a real estate transaction.
This offer is contingent upon the buyer selling their current property located at (Address) within X amount of days from the acceptance of 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 period or any extension period, the buyer and seller agree to sign a mutual release terminating the purchase agreement.
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 because if you never make it to the closing table, what difference does it make what the price offered ends up being?
As a home seller, here are a few things to consider:
- 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 home sale contingency 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 to be 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 giving a thought to accepting a home sale contingency should also consider a kick-out clause. The kick-out clause provides a seller with some relief from being tied into a house sale contingency agreement.
A kick-out clause gives a home seller the right to continue to market their property. If another potential buyer comes along, the original buyer will have a specific amount of time to remove the home sale contingency.
As a seller, you want this period of time to be as short as possible. No more than 24-hours would be a reasonable time frame. By having a more extended period of time, you could lose out on 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 an extremely challenging property 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 left in this scenario is getting a guarantee 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 Succesful Listing The Buyer’s House?
The part that becomes challenging with a home sale contingency is you are now relying on another Realtor or real estate agent who you did not hire and don’t know a thing 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 that should not be in this field. See some key Realtor interview questions you may want to be answered 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 going to be 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 really understand what a right of 1st refusal is!
When you allow a buyer that 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 that wants to buy a home, the last thing I want is to cloud the negotiations by telling them we must have to wait 24-48 hours (the typical amount of time) to give another buyer their “right of 1st refusal”.
Why would I want to be legally bound to get in touch with 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 1st refusal?
Doing so is a pointless waste of time! I have found that some Realtors advise their clients that this arrangement is acceptable from being naive or because it gives them a slight sense of accomplishment even though they have accomplished absolutely 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 does exercise their “right of 1st refusal”? You could undoubtedly have language added 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 in decline.
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.
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 of the common conditions 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 comes in less than the sales price, the buyer would have the option to 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 come 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 inspection by a professional home inspector.
If significant structural or mechanical defects are found during this contingency period, the buyer may terminate the contract. The home inspector will provide a detailed inspection report that showcases their findings.
The home inspection is part of the due diligence period the buyer is afforded to discover the history of the property.
Financing Contingency
Unless the buyer makes a cash offer on the house, there will be a mortgage contingency period. The buyer will attempt to procure financing for a certain percentage of the home’s purchase price during that time.
The loan contingency is one of the most problematic for home sellers. A non-contingent offer without a mortgage contingency is desirable to sellers for this reason.
When a buyer cannot get a mortgage, they can get their escrow funds back, and 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 either by a specific title company or by the attorney involved in the transaction.
With a home purchase, buyers are allowed to purchase title insurance in the event 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.
Final Thoughts
The bottom line is if you don’t want to lose control of the home sale process, avoid contingent sales and 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 have a clear understanding of how home sale contingencies work and whether or not they would make sense in your particular situation.
About the author: The above Real Estate information on how home sale contingencies work was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-435-5356. Bill has helped people move in and out of many Metrowest towns for 35+ Years.
Are you thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Blackstone, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.