How does contingency work when buying a house

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5 min read Published March 02, 2022

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Written by

Erik J. Martin

Written by Erik J. MartinArrow RightContributing writer

Erik J. Martin is a Chicago area-based freelance writer/editor whose articles have been featured in AARP The Magazine, Reader's Digest, The Costco Connection, The Motley Fool and other publications. He often writes on topics related to real estate, business, technology, health care, insurance and entertainment.

As a homeowner, there’s a good chance that your next move will have you straddled with two major decisions at one time: selling your current home and buying a new one.

It’s a process that requires some thought and planning in the best of circumstances. But with housing inventories so low these last few years, the competition among buyers has been fierce in many markets — perhaps making the process seem even more daunting.

If you’re in this situation (or think you will be soon), know you aren’t alone: 51% of all buyers in 2021 owned their previous home, and 53% said finding the right property was the most difficult step of the homebuying process.

Here are the four primary options available to you when it comes time to buy a house that is contingent on selling yours.

What is a home sale contingency?

In real estate, a “contingency” refers to certain circumstances that must be met before a home sale can be finalized. For instance, a property might go under contract with a house inspection or financing contingency. This means that if a significant structural issue is found during the inspection, or the buyer’s financing falls through, they’ll be able to terminate the contract without penalty.

In the case of a home sale contingency, the buyer will be under no obligation to follow through with the purchase of the new house unless their home sells.

These contingencies are typically good for one or two months: giving buyers a set amount of time to put their current house on the market and find a buyer. If their home fails to sell during this timeframe, the contract can be terminated.

There are two different types of home sale contingencies:

• A home settlement contingency is used when the buyer’s home is already under contract, the home inspection is complete and the transaction is moving toward a closing date. Because there are fewer roadblocks in this scenario, it’s typically a more attractive option for sellers.
• A sale and settlement contingency is used when the buyer’s home isn’t yet under contract and they’re still actively marketing the property. Because there are no guarantees that the house will sell quickly (even in the current real estate climate), this clause isn’t as appealing to motivated sellers.

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How does a home sale contingency work?

If you fall in love with a home prior to selling yours, your real estate agent can add a contingency clause to the terms of the offer. This clause will protect you from moving forward with the purchase before your current home sells, and can go one of three ways:

1. You find a buyer for your home and your contract for the new home moves forward as planned.
2. You don’t find a home buyer in the specified timeframe (usually 30-60 days) and the contract for buying the new home is voided. When this happens, you typically will get back any earnest money you put down on the house and will be able to start the search over again.
3. In the event of a “kick-out clause,” another buyer makes an offer on the home that the seller is interested in accepting. According to R.C. Shea and Associates, a kick-out clause is an addendum that gives sellers the ability to keep their home on the market while you try to sell your house. If they find a new buyer, they’ll give you 72 hours (on average) to either move forward with the home purchase or drop out.

How common is a home sale contingency?

With just over half of all buyers owning their previous residences, the process of buying a house that is contingent on selling yours is an everyday obstacle for buyers, sellers, and their agents. And yet, with only 5% of contracts terminated due to contingency issues in 2021, it’s certainly not an obstacle that is insurmountable — especially with a little planning and an experienced real estate agent by your side.



4 ways to buy a house contingent on selling yours

How you move forward in the process will depend on where you are now. Let’s explore the four most common scenarios so that you can put your plan into place.

Choose your own adventure by picking the path that best represents where you are now in the process:

• Your home is under contract and you’re looking for your next dream home (Proceed to Scenario A)
• Your home is on the market and you’re looking for your next dream home (Proceed to Scenario B)
• Your home is on the market and you’ve found your next dream home (Proceed to Scenario C)
• Your home isn’t on the market but you’ve found your next dream home (Proceed to Scenario D)

Scenario A: Your home is under contract and you’re looking for your next dream home

With moving day imminent, your focus is two-fold: make sure your home is packed and ready to go before the closing date, and find your new home.

If you’re already this far along in the process, you probably have a good idea about where you want to move and what your motivations are. For many buyers over the past few years, it has been a desire for more space and to be located closer to friends and family.

As you search for your dream neighborhood, here are a few key things to keep in mind:

• How affordable is the area? You’ll want to work with a top real estate agent to research recent home sales in each neighborhood you’re considering to see if it’s in your budget.
• What is the cost of taxes? Taxes can vary widely between states (and even between towns), so it’s important to factor this into your budget before deciding on a location.
• Are you seeking an urban, suburban, or rural area? 
• What is the proximity to your workplace and/or your children’s schools?
• Do you want access to public transportation?
• Are you seeking a neighborhood with historic charm or is a newly-developed subdivision more your style? 

With your real estate agent’s help, the answers to the above questions can help narrow down your list of potential neighborhoods that you’ll want to target in your search. But just because a neighborhood checks all of your boxes on paper, doesn’t mean it’s the right choice for you and your family. Here are a few online tools that can help take your research even further.

AreaVibes
Investigate the area’s crime statistics, as well as stats on other key factors, such as the area’s amenities, cost of living, education, housing, and weather. When you search for a particular city, neighborhood, or address, you’ll see how it scores in each of the key metrics, as well as how it compares to both surrounding communities and the nation as a whole.

WalkScore
If living in an area where you can walk to the neighborhood coffee shop or grocery store is important to you, then you’ll want to check out this tool. Just type in an address, and you’ll see how walkable and bikeable the area is — as well as how close you are to schools, restaurants, shops, and other areas of interest.

Google Street View
Take a virtual drive through a neighborhood to get a feel for the area, as well as the age and condition of homes, their proximity to each other, and what the traffic situation might look like. Simply type in an address and drop the “street view” icon on the map to start exploring.

GreatSchools
The quality of schools in a community has a big impact on property values and is, therefore, an important metric to consider — even if you don’t have children. GreatSchools pulls together school ratings and information for schools across the country and will compare schools within each state.

CityData.com
This site collects and analyzes data from a wide range of government and private sources to create profiles of every city and state in the country. Type in the name of the city you’re interested in learning about to get stats on the area’s demographics, income, house values, property taxes, crime levels, weather, and more.

Once you’ve identified a few neighborhoods that meet your criteria, it’s time to start house hunting. In a perfect world, your dream home will go on the market in one of these areas as soon as you start your search. If that doesn’t happen, however, or the competition in that area is so steep that houses are getting scooped up quickly, Andy Peters, one of the top real estate agents in Georgia, has an unorthodox plan he used for buyers who needed to find a new home fast.

“We sent out mailers to the neighborhood they wanted to live in,” Peters said. “It was a very simple mailer, one-pager with a picture of the client — in this case, a family of four with their dog — and we told their story.”

The strategy worked. A seller in that neighborhood had just met with an agent and planned to list their house in the next 30 days. They ended up selling their home to Peters’ clients before the house ever hit the market.

In the recent real estate market, selling your home might have been the easy part. If you’re struggling to find the perfect home for you and your family, don’t despair and (just as importantly) don’t settle. It may not be your preferred option, but you could consider a short-term rental as you search for your new home.

Scenario B: Your home is on the market and you’re looking for your next dream home

It’s been a seller’s market in recent years, but with rising interest rates that may be shifting.

While some markets are cooling a bit, it’s likely you will still be in a fairly good position to sell your current home. However, you might find yourself in a tough position when looking to buy another one.

The inventory of available homes hasn’t yet bounced back to its pre-pandemic levels, which was slashed by 37.8% between December 2019 and December 2021. And while inventory is starting to rise slightly, it’s not expected to outpace the number of interested buyers entering the market anytime soon.

This strong demand for housing combined with low inventory means that you’ll be in a good position to sell your current home.

On the flip side, you’ll likely face stiff competition when looking for a new home to buy. With sellers getting multiple offers, you’ll need to create an offer with attractive terms that will stand out from the masses. Having an experienced real estate agent on your side who can help with this process will be key.

Navigating the buying and selling processes at the same time can be overwhelming, as your focus will be split in two very different directions. Unless luck is on your side, it’s also very likely that one process will be completed before the other.

If your home goes under contract first, go back to Scenario A. 

If you find your new home first, proceed to Scenario C. 

Scenario C: Your home is on the market and you’ve found your next dream home

In this scenario, you have to focus on both selling your current home while at the same time preparing the best offer for your next home.

To ensure the fastest sale possible, you won’t want to put any obstacles between your home and potential buyers.

Instead:

• Use a top agent’s advice to price the house for the market. Ask them to show you comparable home sales in the area over the last few months for houses that are similar in size and features to yours. A comparative market analysis (CMA) will help you better understand how to price your home based on the current real estate market.
• Make all repairs that might create buyer hesitation. The biggest things to assess are health and safety issues such as the structural condition of the house, the existence of harmful substances such as mold or asbestos, and anything not up to code. Using a home inspector can be helpful with this process.
• Don’t skimp on staging. According to the National Association of Realtors, 82% of buyers’ agents said that staging a home made it easier for their clients to visualize themselves living there. When completed by the sellers’ agent, staging cost an average of $300 — money that may be recouped at the time of sale. In fact, 23% of buyers’ agents said that a staged home increased the selling price by 1% to 5%.
• Use only the highest quality images for the online listing. With 97% of home buyers using the Internet to search for available properties, hiring a real estate photographer to take professional shots of your property can be a worthwhile investment. A 360-degree virtual walkthrough or video tour can help your property stand out, as well.
• Prepare to move quickly. Through the process of staging the home, all of your personal effects should already be packed away. To make the process of moving out (and into your new home) as easy as possible, transfer all of those boxes to the basement, attic, or a storage facility while your home is on the market.

Now it’s time to focus on that offer for the new house.

Competition is inevitable, and not something you can control. What you can control is making your offer as attractive as possible.

Here are a few tips that can help:

• Offer a higher price than your competitor. In 2021, the average home sold for 100% of the listing price. Expect multiple offers and work with your agent to provide the most attractive offer possible.
• Let the seller stay a while longer. According to Peters, there are offer terms that can mean more than money. “Terms that would be interesting to me, would be if a buyer was willing to give the seller possession after the close,” he said. “In other words, the seller has a week or two to get out of the house, when they’re living rent-free.”
• Consider using a bridge loan. Rather than relying on the sale of your home to fund your new purchase, this short-term solution can be taken out against your current home until a buyer is found.
• Include your current home’s list price with the offer. If you’ve priced your home appropriately (or aggressively), this shows the sellers you’re serious about selling your home.
• Make it personal. Never underestimate the power of sentimentality, even in a business transaction, as Peters showed in Scenario A. With this in mind, include a handwritten, personal note about what makes this property a dream home for you and your family.

Together, this combination of strategies for selling your current home, while making an offer on your next home, will put you on the best path to achieving success.

If you are facing a scenario wherein you’re selling your current home at the same time you are preparing to purchase your next home, consider jumping to our section below called “​​Another way to sell…”

Scenario D: Your home isn’t on the market, but you’ve found your next dream home

Simply put: get your home on the market.

According to the Realtors Confidence Index, houses were on the market for an average of 19 days in 2021. Though that’s a relatively short period of time — it’s been a sellers’ market — it’s still cutting it very close after getting an offer accepted to make the necessary repairs and cosmetic changes to the house, list it, accept showings, review offers, go under contract and close. You run the high risk that your contingent offer will expire or the sellers find another buyer.

That’s even if a seller would take the gamble of accepting the huge risk of a contingent offer from a buyer whose home isn’t listed yet. Peters, for one, would not.

“If you had somebody come to the table and their house isn’t even listed and they want to buy a listing, I am very trigger shy to do that,” he said. “They have to show some motivation that they’re on the market and they’re making a conscious effort.”

When you’re ready to put your home on the market, proceed to Scenario C, or consider a whole new scenario below.

Another way to sell your existing home and buy a new one

If you are a homeowner in scenarios B, C, or D, above, there is also a convenient trade-in option that can significantly reduce the stress of buying and selling at the same time.

With HomeLight Trade-In, we’ll work with your real estate agent to make an offer on your current home, so you can make a strong offer on a new home and close and move on your timeline.

Home does HomeLight’s Trade-In program work?

When you work with HomeLight, we’ll agree to purchase your current home before you begin the homebuying process. This allows you to make a stronger, all-cash offer without having to worry about any lending or home sale contingencies. The process works like this:

1. We’ll make an offer to purchase your current home, which will be payable (as a cash transaction) as soon as you’re ready to close on your new home.
2. This gives you a budget for making a cash offer while house shopping. Because there are no contingencies and the risk is lower, cash offers (even if they are lower than others) are often favored by sellers.
3. Once your offer is accepted, we’ll get moving on the details. First, we’ll purchase your home at the agreed-upon price. Then, we’ll give you the cash to close on your new home.
4. After you’re all settled into your new home, we’ll work with your agent to kick off the home selling process. If the old home sells for more than what we paid for it, we’ll put the additional cash in your pocket (minus any selling and program fees).

Bottom line? Rely on a top agent’s expertise to guide your journey

The process of buying or selling a home can be challenging enough — but when trying to do both at the same time, getting it right can seem downright daunting. Especially in today’s competitive and shifting market, having a top real estate agent on your side will be critical to navigating the twists and turns of any home sale contingency scenario.

Whatever path you currently find yourself on, your next step in your adventure should be to consult with a real estate agent in your area who can guide you through the process. All it takes is two minutes and we’ll help match you with the best real estate agents in your area.

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How long does contingency last?

How does contingency work?

What are the most common contingencies in real estate?

What are examples of contingencies?