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Buy Now, Sell Later - How Contingency Offers Work

May 2nd, 2017

There it is - the dream house. There they are - the dream buyers. And there it is - the catch. The buyers haven't sold their current house and can't make the dream come true for everyone. If you're the buyer, you have an option that can let you put in a bid before you've sold: a contingency offer. If you're the seller and receive a contingency offer, you have a decision to make. But wait - what is a contingency offer?

Simply put, you, the buyer, are saying that your offer on the new home is contingent upon the sale of the existing because you need the money from number one to get to closing on number two - once the former sells, you can afford to buy the latter. There are also cases where you, the seller, put your house on the market with a contingency that you can find a house before you can sell yours.

Sale and Settlement vs Settlement Contingencies

There are two different kinds of contingencies when selling a home: a sale and settlement, and just a settlement. The former is used when the buyer isn't close to selling their home - it hasn't been put up, no contract, etc. - while the latter means that the buyer has a closing date and can't do anything until it is successfully concluded.

One of the key differences between the two is that a sale and settlement contingency often comes with what is called a "bump" or "kick-out" clause that allows the seller to continue to market their home. Should the seller get another offer, the contingency buyer has a set time (the length established when the contingency was put in place) to remove the contingency and move forward with the purchase. If they don't, then the seller can "bump" or nullify that contract and go ahead with the new offer. A settlement contingency, on the other hand, means that no offers can be accepted and the seller has to wait (and hope) for the buyer's successful closing - if that fails, then the contract can be terminated.

Gamble vs Gain

Any real estate professional will tell you that not every closing happens on time - if at all. While the "bump" clause gives a seller peace of mind knowing that they can keep marketing their home, a straight settlement contingency leaves them hanging at the mercy of the Real Estate Fates - who often have very little. In the worst case scenario, potential buyers have come and gone while the contingent buyer's closing process moved along - only to collapse at the last minute leaving the seller empty handed and a month or so out of pocket.

The buyer also incurs financial risks: They have to pay for inspections, etc., just as they would if there was no contingency and will lose that money (but not their good-faith deposit, which is returned) if they cannot sell or complete a successful closing. And while a sale and settlement contingency might buy them some time, there is no guarantee that a better-positioned buyer could swoop in before they can sell their existing home.

Guidance for the contingency minded

As a buyer, you need to honestly assess your current house situation - is it for sale, for how long, etc. - before putting in a contingent offer. There is no need to add additional stress to your life by waking up each morning wondering, "Is this the day someone else beats my offer? Is this the day someone will buy this house? Is this the day my buyer's deal falls through?" It is also important to recognize that in today's low-inventory environment, sellers may be reluctant to add a contingency when they have a good probability that someone will make a "no-strings" offer - plus, the seller might also be less inclined to negotiate on price because of having to put a hold on marketing it until you can come through. Before making a contingent offer, you should consult with a knowledgeable real estate professional about the state of your local market, the market in which you're looking and your home's sale potential.

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