While your home is on the market, and you find your dream home (or at least the perfect “next” home), it is tempting to place an offer on the new place to hold it until your home sells. Unless you own the house you are selling free and clear, or can afford two mortgage payments, selling on contingency is the only option.
Or, you’re the seller and a buyer wants to make a contingency offer on your home. Do you accept it?
What is a “contingency”?
A contingent offer means that completion of the sale or purchase does not finalize until a requirement, the contingency, is satisfied. In many cases, the contingency is simply good business practice such as having a home inspection or making necessary repairs to the home. In other cases, the contingency waits on an appraisal: mortgage companies rely on an appraisal before approving the amount of the mortgage, so if the home’s appraisal does not meet the asking price, the buyer could back out due to the inability to get a mortgage approved. This is a “mortgage contingency.”
The more difficult type of contingency for both buyer and seller is the one that relies on the buyer selling his own home before completing the purchase of the new home.
How does a first home sale contingency work?
For buyers, this sort of contingency is mostly a win/win scenario. If their current home does not sell, or the sale falls through for any reason, they do not have to complete the purchase of the new home. This protects the buyer from having to pay two mortgages at once. Even so, the buyers typically must place earnest money on the purchase of the new home that they will lose if the sale falls through. They also forfeit costs of home inspections and appraisals, bank fees and other expenses. Without a contingency, however, contractually they would be on the hook for the complete sale price.
Conversely, the seller also has some protection in this case since he can continue to market his home, and if the contingency falls through, she may be able to keep a portion of the earnest money as “liquidated damages.” If, during the contingency period, the seller receives a second offer on the home, the original buyers with the contingency have a specified time—typically 24 to 48 hours, or even up to 72 hours in some agreements—to settle the contingency and purchase the new home. If they are unable to do so, the seller is free to terminate the contract and accept the new offer.
A home sale contingency does pose risk to the seller, however, because a motivated buyer may not be willing to risk having her purchase fall through because of the prior contract. Before accepting a contingency arrangement, the seller’s agent will determine the potential buyers’ actual ability to purchase the home:
- Do they have a preapproval letter from their mortgage company?
- Do they have a contract in place on the sale home?
- If not, is their current home already on the market?
- If so, has it been on the market a long time and is it priced to sell?
We can investigate the likelihood of the sale completing, so when you do receive a contingency offer you can be confident in your decision whether or not to accept it.
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