A Guide to Contingent Contracts When Purchasing a Home

FT Contributor  | 

Finding the perfect house you want to buy is exciting. However, still having your current home up for sale throws a wrench in your plans. The expense of buying a new home while still paying the mortgage on your current home as it’s on the market is financially daunting.

One option you have when placing an offer on the new home is to use a contingent contract. This type of contract protects you as the buyer from the dilemma of owning two homes at once.

This home buying option makes it easier for you to snag the home you want without the fear that your current home won’t sell. Understanding how a contingent contract works, including its benefits and drawbacks, allows you to figure out if this type of contract is best for you as a home buyer.

What Is a Real Estate Contingent Contract?

Whether you’re buying a bigger home or downsizing, it’s crucial for you to be able to sell your current home before you take on a new home loan. If you find the home you want to buy before your home has sold, you can submit an offer that includes a contingency clause.

When you submit a buyer contingency form along with your offer and the seller accepts, you aren’t obligated to close on the home unless your home sells. The contingency form outlines the specific details of this clause, including how much time you have to sell your home and the date on which the contract is void if you can’t sell.

Effects of Contingent Contracts on Buyers and Sellers

A real estate contract that includes a contingency clause protects the buyer but is generally not appealing for the home seller. If the seller agrees to the contract, it’s not guaranteed that the home will sell by the date outlined in the contract. The contract is cancelled if the home doesn’t sell, leaving the seller in search of another home buyer.

If a home seller is wary of agreeing to a contingency contract, the real estate agent may include additional legal documents to protect them. A removal of the sale contingency form may be included with the contract. This allows the seller to cancel the contract within 72 hours if they receive another offer on the home that’s more beneficial.

The seller’s real estate agent may also include a back-up offers only form with the contract. With this additional form, the seller can’t cancel the contract as long as the buyer sells their home within the guidelines outlined in the contingency. However, the seller may accept back-up offers while waiting. This gives the seller other options in case the buyer breaches the real estate contract and can’t sell their home by the date agreed upon in the contingency.

Real Estate Contingency Clause Example

For example, say you’ve been thinking about moving and you find the perfect home to buy. Your current home is still for sale so you submit an offer with a contingency clause that you’ll sell your home by June 15. Since you know the seller may see the contingency clause as a red flag, you offer at least asking price as an incentive.

The seller agrees but is concerned about taking the home off the market for a deal that could be cancelled. To protect the seller, a form that allows them to accept back-up offers between now and June 15 is included with the contract. You agree and once you’re approved for financing, the deal is on.

The seller accepts two back-up offers, which they may legally accept if you don’t sell your home by June 15. However, on June 2, your home sells and you execute the contract with the home seller. You set the closing date and complete the home buying process after you’ve sold your home.

The Pros and Cons of Home Sale Contingency Clauses as a Buyer

There are benefits and drawbacks to the buyer and seller when a contingent contract is used.

Benefits

  • Buyers don’t have to worry about paying two mortgages.
  • It gives buyers more time to sell their current home.
  • Sellers may receive higher offers to incentivize them to accept.
  • In a slow market, sellers may welcome any type of offer.

Drawbacks

  • If the contract doesn’t include additional forms, the seller is obligated to wait until the contract is void before accepting other offers.
  • The seller generally pays property taxes and fees while the home is under contract.
  • If a removal of the sale contingency form is included, the buyer may lose the home when another offer is made.
  • Buyers may accept low offers for their current homes because they’re pressured to sell fast.

As a home buyer, it’s usually best to wait until you’ve sold your home before buying a new one. You can take your time selling your home and ensuring you receive a good offer. You may also have additional financing offers since you could provide a larger down payment after the sale of your home.

Important Considerations When Agreeing to a Contingent Contract

Before signing a legally binding contract, ensure you understand all terms and conditions. In some cases, you may need to enlist the help of a legal professional to review the contract first, especially if it includes clauses. There are certain factors to consider before agreeing to the contract.

Status of Your Property

The home seller may want to know more about the potential home buyer’s process and how close they are to selling their current home. Sellers are usually eager to sell their homes as well and want to close on the home quickly and move on.

In the contingency clause, the potential buyer may need to provide information that shows the seller how close they are to selling their current home. They’ll need to inform the seller whether their home is on the market yet, up for sale, or already in escrow.

If the home isn’t on the market or is up for sale with no interest from potential buyers yet, the seller has more negotiating power over the buyer. In some cases, the seller may not be interested in the deal at all. It shows the buyer isn’t motivated to sell the home quickly and that it may take too long to complete the sale, voiding the contract and wasting the seller’s time.

Date of Closing on Your Property

As a potential buyer with a contingency contract, there’s a specific date by which you must close on your current home to keep your contract active. The contingency clause makes your home selling process tricky since anything can go wrong.

The closing date may not work for your buyer or you may take too long negotiating the deal and miss the deadline. If you miss the closing date, your contract with the home seller may be void and you could lose out on the home.

Right of First Refusal

Even if the home seller agrees to a contingency contract, they generally have the right to continue marketing their property to potential buyers. If a removal of the sale contingency form is included with the contract, the seller may cancel the contract if a better offer comes along from a potential buyer. The seller may also cancel the contract if the buyer doesn’t sell their home by the date included in the contract.

A contingency contract makes the home buying process a little more complicated. However, if you find the perfect home before you’ve sold your current one, it may be necessary. Ensure you understand the terms of the contract and the clauses included before you sign it.


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