A home sale contingency is a contingency clause that is included in a real estate sales contract or an offer to purchase real estate. The clause indicates that the transaction is dependent and provides the homebuyer a specified timeframe to sell and settle their existing home to finance the new property.
Many homebuyers start looking for their ideal property before their existing home is sold. If they find one, they will usually make an offer, so it does not slip away. But if their existing home does not sell, the contingency clause allows buyers to back out of the contract without being held liable.
Two types of home sale contingencies:
Sale Contingency
A sale contingency is dependent upon the buyer selling an existing home and getting the money to then purchase the new home they are interested in. This clause is added if the buyer has not yet received or has not yet accepted an offer on their existing home.
This type of contingency clause allows sellers to continue to market the property to other potential buyers, who will have a certain period (usually one or two business days) to either push through with the sale or terminate the clause to allow the seller to market the property to other buyers.
Settlement Contingency
A settlement contingency is used if the buyer has already marketed their existing property, found a buyer, and has a scheduled settlement date by which the sale will be closed. But if things go wrong at the last minute of the closing, the seller will still have the chance to push through with the property as this clause prohibits sellers from accepting offers from other prospect buyers in a certain period.
If the settlement does not happen within that time frame, then the contract will be terminated, and the seller can then market the property to other buyers.
The Reasons for Contingency Clauses
Contingency clauses are favorable for buyers because they can avoid owning two homes and holding two mortgages at one time while waiting for their own home to sell. A home sale contingency also means they can move from one home to the other right away, instead of selling their existing home and then trying to find a place to live temporarily until their new home is ready.
The disadvantage is that buyers will usually have to pay a bit more for the property than if they made an offer without the home sale contingency clause. This is because they are asking the seller to take a risk that they might or might not get their money. The sale could fall through, so buyers would pay a bit more to compensate the seller for basically taking their house off the market.