Some real estate contracts include home sale contingencies that can either complicate or streamline a sale. Many buyers and sellers are unaware of the implications surrounding contingency clauses. To make sure your clients understand what they’re getting into, consider the following:
What Are Home Sale Contingencies?
In essence, home sale contingencies are contractual agreements that protect buyers and sellers from undesirable outcomes. There are two types of contingencies for a home sale: a settlement contingency and a sale and settlement contingency.
As the wording implies, sale and settlement contingencies are dependent on a buyer selling and settling an existing home. Most buyers need to sell an existing home to pool enough resources to purchase a new property. With a sale and settlement contingency, the seller maintains the right to continue marketing the home to other buyers, with the understanding that the original prospective buyer will have an opportunity to remove the contingency within a certain period (usually 24-48 hours) if the seller gets a new offer. If the original prospective buyer can’t remove the contingency, the contract is void. At that point, the seller is able to accept a new offer, and the earnest money deposit returns to the original prospective buyer.
With a settlement contingency, the buyer already has a contract in hand and an agreed settlement date. Since the home sale isn’t final until the closing or settlement occurs, the settlement contingency protects the buyer if the agreement falls through. In most instances, this type of contingency keeps the seller from accepting any new offers on the home for a certain period. If the buyer’s existing property closes by a set date, the contract agreement remains valid. If, on the other hand, the existing property does not close, the contract can be voided.
From a Buyer’s Perspective
A home sale contingency provides buyers with the time they need to sell an existing home before committing to a new home. This protects them from holding two mortgages on two homes. It also alleviates concerns over being caught between residences. Home sale contingencies can also ensure a more seamless transaction, since the buyer is able to sell one home and move into the new home, which is effectively “locked in.”
That said, although home sale contingencies can offer peace of mind, they don’t save buyers from having to spend money on non-refundable appraisal fees, bank fees and home inspections. Also, because the entire transaction depends on the buyer’s ability to sell an existing home, sellers may ask for more money to compensate for this risk.
From a Seller’s Perspective
Home sale contingencies can be risky for sellers, because there is no guarantee the buyer will sell his or her existing home. Even if the seller is able to market the home and accept offers from other buyers, the property will appear less attractive, because it is listed as “under contract.”
Before agreeing on a home sale contingency, sellers should investigate the buyer’s existing home to determine:
- If the property is already on the market; if not, it suggests the seller is merely thinking about buying and selling.
- If the home is listed at an appropriate price, based on comparable properties in the area.
- How long the home has been on the market; if it’s encroaching on 90 days, the odds of a sale aren’t good.
In most instances, it is advisable for sellers to provide no more than four weeks for a prospective buyer to sell his or her existing home. This puts pressure on the buyer to lower the asking price and make a sale before they lose the contract on the new home.
Sellers can also include so-called “kick-out clauses,” which allow them to continue marketing a property and accepting offers from other interested buyers. In this instance, the seller affords the buyer a time limit (such as 72 hours) to continue with the contract by removing the home sale contingency. If they can’t, the seller will then be free to sell to someone else.
The Bottom Line
Home sale contingencies can be an asset for buyers, who need to sell a property before purchasing another. On the other hand, they can be either helpful or frustrating for sellers depending on the circumstances. Whatever the case, because contingencies are legally binding, it’s important for both buyers and sellers to review and understand the terms before agreeing to a contract. By providing clear guidance about the various outcomes that could result from accepting a home sale contingency, you can help your clients avoid surprises, while promoting a more seamless, successful transaction.
Visit 2-10 HBW for more information about how home sale contingencies can help real estate agents and their clients.
