“Contingent” can be a scary word, especially when it comes to something as serious as spending hard-earned savings on a house. It signifies something being conditional, being not locked down. That scary word, however, can save you from going into major financial stress when moving from one home to your next.
When families outgrow their former dream house and find a new one that checks all their must-have boxes, they’re faced with a problem: How to buy that new dream home without being stuck with the existing house’s mortgage? A realtor can help you put your home on the market and navigate the tricky waters of how to buy a house contingent on selling yours.
Here’s how to buy a house contingent on selling yours.
What a Contingent Home Sale Means, and How it Works
When you buy a house contingent on selling yours, it means that you buy the house only in the case that your current home sells. Your realtor will add a contingency clause to the terms of the home offer. Contingencies protect buyers from carrying two mortgages, and they can go in three ways:
1. You find a buyer for your home, and your contract for the new home moves forward as planned.
2. You don’t find a home buyer in a specified timeframe (usually 30 to 60 days), the offer and contract for buying the new home is voided. Buyers may return any money sellers put in, and you start fresh searching for a new house.
3. The sellers put an addendum into the contract known as a kick-out clause. According to R.C. Shea and Associates, sellers can keep their home on the market, and if they find a new buyer while you are trying to sell your house, they will give you 72 hours to continue the contract or drop out so they can accept the new offer.
The Good Thing About Contingent Home Sales: You’re not alone.
In U.S. in 2015, 67% of homebuyers have bought a home before, according to the National Association of Realtors. That isn’t changing much in 2016 either: across April and May of 2016, only 30% of homebuyers were first-time buyers. The majority of buyers are moving from one home they own to another, so buying a house contingent on selling yours is an everyday obstacle for buyers, sellers, and agents.
The game plan for how to buy a house contingent on selling yours depends on your place in the home-buying process.
Choose your own adventure by picking the path that shows your starting point:
- Your home is under contract and you’re looking for your next dream home (Proceed To Scenario A)
- Your home is on the market and you’re looking for your next dream home (Proceed To Scenario B)
- Your home is on the market and you’ve found your next dream home (Proceed To Scenario C)
- Your home isn’t on the market but you’ve found your next dream home (Proceed To Scenario D)
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Scenario A: Your Home Is Under Contract And You’re Looking For Your Next Dream Home
Your Game Plan:
The current home should be packed up and ready to move or in storage. Finding a new house is the No. 1 mission. A good place to start is to narrow down your dream neighborhood. Make a list of absolute must-haves when it comes to a new community and draw up a profile of an ideal neighborhood, taking into account the following, at minimum:
- Affordability. Work with a realtor to find the price point of recent sales in a particular neighborhood to see if it’s within your budget
- Cost of taxes, which should also factor into your budget if you’re moving between states
- Urban, suburban, or rural?
- Proximity to workplace and children’s schools
- Access to public transportation
- Age of the neighborhood. Do you want a historic area or a new development?
When you’ve completed a dream neighborhood profile, pass it along to your realtor, who can help narrow down the areas that tick all the boxes. Once you have two to five “perfect” neighborhoods on your list, it’s time to begin the research phase, investigating just how “perfect” they are.
Check out these sites:
Investigate the area’s crime statistics to see how comfortable you are with the data.
Depending on your lifestyle, proximity to restaurants, grocery stores, boutiques, or theaters may be crucial. WalkScore shows access to these places in your immediate vicinity.
This site has an endless supply of information, ranging from hospital ratings to air pollution to weather patterns.
If this research phase helps define one or two neighborhoods, it’s time to visit. Start house hunting in these neighborhoods, and don’t forget to visit both in the daytime and in the evening. The supposed quiet, family-friendly dream area may become a noisy, bar-hopping scene after 11 p.m.
Ideally, you will find your dream house in this dream neighborhood. If you’re struggling to find that on the market, however, Andy Peters, one of the top real estate agents in Georgia, has a last-ditch, unorthodox plan for couples needing to find a new home fast.
“We sent out mailers to the neighborhood they wanted to live in … It was a very simple mailer, one-pager with a picture of the client—in this case a family of four, with their dog—and we told their story,” Peters said.
We told why they wanted to move to this area, why they identified this neighborhood as the best fit for them and their family. We spelled out who their friends were in the neighborhood. We spelled out that we had exhausted our search, seen everything on the market, and had not found what they were looking for yet.
A seller called Peters to say they just met with a realtor and were listing their home in 30 days. They sold the home to Peters’ clients before it ever hit market.
During the course of the home search, keep in mind your fallback option: renting.
Call up short-term rental options to get information on pricing and leasing terms. If you don’t find a new home before you close on your current one, renting could be a less attractive, but viable option.
Scenario B: Your Home Is On The Market And You’re Looking For Your Next Dream Home
Your Game Plan:
The good news? It’s a sellers’ market. The bad news? It’s a sellers’ market. You’re in a good position to sell your home but a tough position to buy another one.
Since 2012, mortgage rates have remained low—with 30-year fixed rates still below 4%, according to the Realtors Confidence Index in April 2016—the amount of new jobs has been increasing, and obtaining a mortgage has a very low cost barrier. These factors have flooded the market with buyers, putting the sellers in the power position.
So, as a seller, you have that power, but as a buyer, you are going to have to work hard to find what you want and put in an offer with attractive terms to compete.
This scenario can be overwhelming with a divided focus. Unless lightning strikes and on the same day you find your dream house a magical offer arrives in your realtor’s hands—chances are you’re going to be sorted into one of two scenarios.
If your home goes under contract first, go back to Scenario A.
If you find your new house first, proceed to Scenario C.
Scenario C: Your Home Is On The Market And You’ve Found Your Next Dream Home
Your Game Plan:
In this scenario, you have to focus on both selling your home and preparing the best offer for another home.
Don’t put any obstacles in the way of selling the existing home.
Use a realtor’s advice on how pricing the house right for the market.
This isn’t the time to get greedy. Ask them to show comparable home sales in the area over the last few months for homes with the same square footage, number of bedrooms, and other similarities. Assessor and property tax records are public record, so search a public database online to verify this information or visit the area’s city or state department offices in person.
Make all repairs on things that will cause buyer hesitation.
The biggest things to assess are health and safety issues, such as the structural condition of the house, the existence of any substances such as mold and asbestos, and anything not up to code. Find these problem areas with a home inspector.
Don’t skimp on staging.
The National Realtors Association’s 2015 Profile of Home Staging shows the median price for staging is only $675—a small price considering 32% of realtors believe staging can increase the dollar value of the home by 1 to 5%. For a $300,000 house, that can be up to $15,000.
Use only the highest quality images for its virtual listing.
Millennials are driving the movement of finding their house online, so invest in a professional to photograph the home. No dirty dishes in the kitchen or dog lounging on the couch. Hell, you might even want to bring in a video crew to get the house ready for emerging new technologies like Virtual Reality touring and virtual staging.
Prepare to move, quickly.
Through the course of staging, all personal effects should already be removed, so transfer these boxes to a storage facility or pack them out of the way in the attic or basement of the house, if possible.
Another path would be to consider renting out the home while it’s on the market. Only rent, however, if you must. Holding open houses and keeping a house in its pristine, staged condition will be difficult with renters.
Also, because selling quickly means running the risk of having to remove the tenant, ensure any renter understands the short-term nature of the lease by making it month-to-month or even week-to-week.
If your home sells before you put in an offer or while that offer is under consideration, notify the sellers and head back to Scenario A.
Now, you have to focus on that offer for the new house.
An April 2016 report by the National Realtors Association shows a steady increase in foot traffic for homes on the market. Competition is inevitable, and it’s not something you can control.
What you can control, is making as attractive an offer as possible when buying a home contingent on selling yours.
Here’s how to make the offer appealing:
Offer a higher price than your competitor.
Kind of a no-brainer.
Let the seller stay a while longer.
According to Peters, there are terms that can mean more than money. “Terms that would be interesting to me would be if a buyer was willing to give the seller possession after the close,” he said. “In other words, the seller has a week or two to get out of the house, when they’re living rent free.”
Try using a bridge loan.
Agree with the sellers’ terms on closing date, and consider using a bridge loan, which according to Investopedia, is a short-term loan buyers can take out against their current home to help finance the new home, prior to selling their own property.
Include the list price with the offer.
Show the sellers you are serious about selling. Include the home’s listing with its appropriate (or aggressive) pricing.
Make it personal.
Include a handwritten, personal note about what makes this property a dream home for you and your family. Never underestimate the power of sentimentality, even in a business transaction, as Peters showed in Scenario A.
This combination of tactics for selling your current home and offering on your next home will put you in the best path for achieving success.
Scenario D: Your Home Isn’t On The Market But You’ve Found Your Next Dream Home
Your Game Plan:
Simply put: Get your home on the market.
According to the Realtors Confidence Index, the median days a home is on the market in April 2016 is 39 days. Though that’s a relatively short period of time—it’s a sellers’ market after all—it’s still cutting it very close after getting an offer accepted to make the necessary repairs and cosmetic changes to the house, list it, accept showings, review offers, go under contract, and close. You run a high likelihood that a contingent offer could expire or they’d find another buyer.
That’s even gambling that a seller would be willing to accept the huge risk of a contingent offer from a buyer whose home isn’t listed yet. Peters, for one, would not.
“If you had somebody come to the table and their house isn’t even listed and they want to buy a listing, I am very trigger shy to do that,” he said. “They have to show some motivation, that they’re on the market and they’re making a conscious effort.”
When you put your home on the market, proceed to Scenario C.