When you closed on your first home, you probably weren’t thinking that one day you’d want to sell. But after a few years, it’s easy to outgrow your space. Or, maybe you have to relocate for a new job — or it’s time to downsize.
Whatever your reason, if you currently own a home, it can actually make it harder to shop for a new one! Getting the timing right — selling your old house, closing on a new house, and then moving into your new house — can be a challenge.
This is why many buyers make offers on their new home that include a sales contingency. With a sales contingency in your offer, you won’t have to close on your new home unless you’ve sold your old home. But a sales contingency could also make it harder to get an offer accepted.
Christina Roberto, an agent in Georgetown, Texas, who works with 78% more single-family homes than the average agent in her area, has had offers with sales contingencies accepted even in a hot seller’s market. “You can offer a bigger option amount, more earnest money, don’t ask for home warranties — there are unconventional ways to win,” she says.
If you have to make an offer contingent upon selling a house, here’s what you need to know.
What is a contingency?
When you make an offer on a house, it could be as simple as a letter or as complex as a several-page legal document. Regardless of its format, it will include contingencies.
A “contingency” is another way to say “a term or condition that must be met before the sale can move forward as planned.”
If the contingency isn’t met, it usually means that you can drop out of the purchase and get your earnest money back. There are two common contingencies that your agent will probably talk to you about including in your offer if you’re already a homeowner: a sales contingency, or a settlement contingency.
A sales contingency is when you will need to sell your current home in order to close on the house you’re offering to buy. If you haven’t received or accepted an offer yet, this is the contingency your agent will put in your contract.
A settlement contingency is when you’ve already got a buyer for your current home, but you need to make sure the deal closes (or settles) in order to buy the house you’re offering on now.
If your current house doesn’t sell, or the settlement doesn’t happen, as the buyer, you can walk away from your new purchase with your earnest money.
There are lots of other kinds of contingencies — inspection contingencies, appraisal contingencies — but the sales contingency can be especially tricky. You can’t control the market or guarantee that someone will buy your current house, and sellers might be worried they’re taking their home off the market for a deal that could fall through.
“The No. 1 reason that sellers are reluctant to accept an offer with a sales contingency,” says Roberto, “is that now there’s double risk. If you have a buyer who’s going to get a mortgage, it has to make it across the finish line. Now you have a buyer who has to sell their home, too, so there’s another risk.”
Sales contingency pros and cons for buyers
Why include a sales contingency in your offer?
Pros of a sales contingency for buyers
You’re protected in case your house doesn’t sell — you won’t be on the hook to pay two mortgages at once. Without a sales contingency, you’d have to buy your new home even if you hadn’t yet sold your current house. Most people can’t afford a double mortgage. Besides, getting a second mortgage will probably be tricky without freeing up the funds from selling your current home.
A financing contingency — which says that if your lender can’t close the mortgage on your home, you can back out — will protect you if you need to sell your current home to get the money to qualify for your new loan. But if you qualify for the new mortgage without the proceeds from your home sale, and if you also don’t include a sales contingency, then there’s a real possibility you’d have to close on the second house even if you can’t sell the first, leaving you with two mortgages to pay.
With a sales contingency, you’ll also get your earnest money back if the deal falls through because your existing home doesn’t sell. If you already have a buyer for your home, but they can’t secure financing, or they back out for another reason, you wouldn’t forfeit your earnest money on your new home.
A sales contingency also helps smooth the transition into your new home. With it in place, you can request a closing date from your buyers that allows you to move right into your new house, so there’s no gap in housing.
Cons of a sales contingency for buyers
In a hot market, sellers might be seeing offers without any contingencies, which makes a sales contingency a tough sell. In a seller’s market, homebuyers are waiving inspection contingencies, financing contingencies, and sales contingencies. Most sellers won’t even look at an offer with a sales contingency if they have multiple offers that don’t include one.
Maybe you come in with an offer significantly over the list price, and the seller is considering it. They can add a “kick-out clause” to protect themselves. This means they can keep accepting offers from other buyers, and if your house doesn’t sell, and they get a better offer, you lose the house.
They can also add a “right of first refusal” clause where if they get a better offer within a certain timeframe (72 hours, let’s say) then you have to either remove the contingency or lose the house.
There’s time pressure with contingency — you are under a crunch to get your house sold so you can buy a new one, and that’s stressful!
Sales contingency pros and cons for sellers
How does a sales contingency benefit a seller, and why would they consider an offer with one?
Pros of sales contingencies for sellers
An offer means that a buyer is interested in your house. If the seller’s house has been sitting on the market for a while, any offer might look good to them. In this instance, you’ll probably have better luck getting your offer accepted even with a sales contingency.
For a seller, they still have some negotiating power around this contingency. The kick-out clause lets them keep their options open but keep your offer in play.
Cons of a sales contingency for sellers
The biggest con for most sellers is that their sale is going to depend on another home’s sale, which is stressful and not ideal as a seller. They’re waiting for the sale of your house to close before they know for sure that their home will sell.
If the buyer’s house doesn’t sell, then the buyer gets their earnest money back, and the seller has to start over with another buyer. This is why, if they do have other offers, most sellers are reluctant to consider one with a sales contingency.
How do you navigate a sales contingency as a buyer?
So are you completely out of luck if you’re a buyer who needs to put a sales contingency in your offer? No! But you may need to put more thought and planning into your house hunt.
First: Is your home on the market yet?
If it’s not, and you know you want to make a move soon, it makes sense to list it. As Roberto puts it, buyers “need to know what their pocketbook looks like.” If you don’t know what you’ll net from your current home sale, it’s hard to start home shopping.
But, what if it’s on the market but not selling?
Figure out why your home isn’t selling
If your home is on the market and it’s just not moving for some reason, explore why with your agent.
Take a look at comparable recently sold homes and be honest with yourself — did you list it too high? Should you drop the price? It’s natural to want to get top dollar for your current home, but if a refusal to budge on price is causing you to miss out on your new, dream home, it might be time to go lower.
Could you be marketing it more widely or better? Is it listed in local Facebook groups, or promoted on your agent’s website? If potential buyers just aren’t finding it, ask yourself why, and then figure out what you can do to get it in front of more eyeballs.
Showing feedback can be an invaluable resource. Are there features or repairs that buyers keep commenting on that could be improved or made? Maybe a quick coat of paint, or replacing the handles on kitchen cabinets, would help it sell.
Another option is to turn to the investor market. Can you sell to an investor or another buyer that can close a deal quickly? Your agent might have sources they can call upon if they also work with investors (or know agents who do), but be aware that most investors prefer to buy at a discount to protect their cash flow.
Once you’ve accepted an offer on your current home, Roberto thinks you can start looking in earnest.
“Most of the time, an offer with a sales contingency isn’t even going to be feasible unless the buyer’s home is already on the market, under contract.”
It’s more likely that sellers will entertain your offer because there’s less concern your home sale will fall through. You’ll need to strategize for the interim period between homes, however.
Ask for a rent-back clause
Worried about being temporarily homeless? You can always ask for a rent-back clause or an extended closing timeline if you need one for the home you’re selling. In hot markets, many sellers are asking for — and getting — rent-backs.
With a rent-back clause, the buyer lets you stay in the home for a predetermined amount of time. This way, you’ve closed on your home sale, and you have your cash in hand to shop for a new house, and you’ve got a place to stay.
These rent-backs have become so common in 2021 that Roberto says she’s got three or four people under contract at any one time, and all of them have free leasebacks with no deposit or daily fee.
Sell and move short-term
Another option is to sell your current house and move into a short-term rental if there’s a gap between homes. Once the sale of your current home has closed, put your stuff in storage and move into an Airbnb.
As hard as it can be to live somewhere short-term, you don’t want to rush into a new home purchase. And having your cash out of your last home makes it easier to offer on a new one.
Second: Have you found the home you want to buy?
If you haven’t found a home you want to buy, work with your agent to find a house that works for you and with timing that will hopefully eliminate a need for a contingency.
Once you do find your next home, that makes selling your current home all the more urgent! Be sure to keep your agent (or agents) informed of where you’re at with both your sale and new home purchase every step of the way.
Third: Explore all your options and how you can make the best possible offer
Programs like HomeLight Trade-In give you the opportunity to qualify to have your home purchased up front, in cash, so you know exactly how much you have to shop with, and you can eliminate the traditional sale contingency.
Some lenders offer a product called a bridge loan. Designed to “bridge” the gap” between home sales, they come with high interest rates and short terms, and your current home’s equity secures the loan. A bridge loan might be a good option if there is a right-of-first-refusal clause and another offer comes in on the home you want to buy.
Offer a rent-back to the seller so they can stay longer. They could be facing the same issue — buying a new home with a sales contingency — on the other side of the transaction. Giving them the flexibility to home shop while still living in their home could definitely sweeten your offer!
Roberto advises buyers to get a deposit if you decide to offer the sellers of your next home a leaseback period.
“Most of the time, sellers are proud of their home, and they don’t plan on damaging it,” she says, “But movers hit walls, and things happen. I get about a $1,500 security deposit for my buyer clients to at least recoup something.”
Consider offering the seller other concessions, too. In one unconventional offer, Roberto’s buyers waived the proration of property taxes. In her area, taxes are paid in arrears, so in a typical purchase, the seller has to give the buyer a prorated amount for taxes for the days they’ve lived in the house thus far. Her buyers waived this proration, agreeing to pay the full year’s taxes, which meant the seller kept more of their proceeds from the sale.
Other concessions include waiving home inspection or the appraisal, or even financing contingencies. But before you decide to waive these contingencies, talk with your agent and your lender. It’s important to know that you will likely lose your earnest money deposit if, for example, you waive an appraisal contingency but the appraisal comes in lower than your offer price and you can’t make up the value difference, meaning your lender likely won’t be able to close your loan. And if you exclude the financing contingency, then even if you can’t get a mortgage, you’ll still be financially responsible for the home. Not ideal!
Don’t just submit a standard offer; write an offer letter to go with it! A personalized offer letter can sway home sellers to view you favorably. Include details like why you love the seller’s home or why you’re moving. Your agent can reach out to their agent to discover what might most appeal to them.
Fourth: Write your offer and hope for the best
All you can do is try, right? If you’ve found a home that you want to buy, and have put together as strong an offer as you can, try submitting it and see what happens.
Your agent can give you a sense of whether your offer is strong enough before you submit it, so make sure you’re consulting with an expert!
Header Image Source: (Fer Troulik / Unsplash)