Home Sale Contingency – What is it and how does it work?

If you are selling a home in Massachusetts, it is possible that you will encounter a buyer who wants to purchase your home with a home sale contingency.   And you will ask yourself, “should I accept a contingent offer on my home”?  I hope to explain this in detail so that you may make an educated decision because in certain price points, you may only have buyers that have a home to sell.  Let’s face it, there aren’t too many people who have the financial ability to carry two homes or have the ability to get temporary housing after they sell their home.  So we should consider a contingent buyer a necessary evil.

A home sale contingency is when a buyer has a home to sell.  This home may or may not be on the market presently.  The reason it may not be on the market could be in a seller’s market when inventory is tight.  A buyer may not want to list their home because they can’t find a home they like and are worried about being homeless if their home sells too fast.  Or the buyer has their home on the market, whether they have a buyer or not, it’s on the market for sale.  So that buyer views your home and falls in love and wants to write an offer.  Their offer will contain the typical home inspection and mortgage contingency as well as a home sale contingency or “subject to the sale of…”.  If the buyers home is not on the market, they may state in their offer that they will have it listed by such-and-such date or they may include a home sale contingency addendum that states they will have their home under contract/agreement by a certain date.

Some Realtors would advise against taking a home sale contingency! Seriously!  I think this is a disservice to your seller client because you may be waiting for a unicorn to come along.  Let’s say your home is on the market for $700,000.00 in Walpole and we are in sellers market with tight inventory.  You have an open house and 20 couples come through and all express how much they love your home and want to do an offer but each couple has a home to sell.    This is not an unlikely scenario because, as stated earlier, most people’s cash is tied up in their existing home and they need to sell that home to get the cash to purchase the upgrade home.  There aren’t many people in that price range that do not have a home or a condo to sell.  So now you’ve lost 20 buyers because your real estate agent said don’t take an offer that is subject to the sale of another house.  So now your house is lingering on the market because you’re in a price range that most people have homes to sell so now you’re looking for someone relocating into Massachusetts or someone who sold their home and found temporary housing.  So you can see why I say you’re waiting for the unicorn and in the meantime, your market time is going up and your doing price drops to attract more buyers who may have a home to sell!  Don’t let a real estate agent tell you this is a bad idea – be informed about it.  Try putting yourself in that situation?  Your selling your home (its on the market and under agreement) and downsizing and you find your dream home and want to do an offer but that real estate agent says “no, we don’t want contingent buyers”!  So now what do you do?  Sell and stay with relatives or temporary housing?

Real estate agents are afraid of the home sale contingency and justifiably so because there is a lot more chances for things to happen and go wrong.  I don’t want anyone reading this to think there is no risk with accepting a home sale contingency because there is.  When you have what we call a back-to-back real estate transaction (meaning the sale of your home is contingent on the sale of someone else’s home) you have double the parties (2 buyers instead of one) and you have zero control over the first transaction that has the potential to impact your transaction. And if you (the seller) are buying a new home, there are now 3 transactions associated with the sale of your home. And this is the number one reason why real estate agents dislike home sale contingencies.  It definitely is a lot more work for the real estate agents and attorneys and requires everyone involved to be proactive and on their “A” game.  But I am a firm believer that these can work and we have completed many of these during my time as a real estate agent and real estate paralegal.  The key is that you need to have real estate agents, lenders and attorney’s all working together and being proactive.  Let’s face it – problems in ANY real estate transaction arise whether there are back to back transactions or just a single transaction.

Right of First Refusal (Kick-Out Clause)

One of the things you can do to protect yourself when accepting a home sale contingency is adding a “Right of First Refusal” in your counter offer to the buyer of your home.  This, simply put, is telling buyer that you will continue marketing the home and soliciting other offers.  Should an offer come in from a buyer who does NOT have a home to sell, you (seller) notifies the first buyer that you have an offer and they have 48 hours to remove the home sale contingency and move forward.  Example:  Pete is selling his home in Walpole to Rob, a buyer who has a home to sell.  When Pete received the offer from Rob, Pete’s real estate agent tells Rob’s Realtor that we accept Rob’s offer but we are putting on a “Right of First Refusal” or “Kick Out” clause.  The Walpole house remains on the market and Pete gets another offer from Nancy who does not have a home to sell.  Pete lets Rob know he has an offer and tells Rob he has 48 hours to remove the contingency to sell his house (note Rob needs to get a new pre-approval showing his ability to get a mortgage isn’t reliant upon Rob selling his home).  If Rob cannot do this, he notifies Pete and Pete can now accept Nancy’s offer and move forward.  This option doesn’t make you lose market time (contrary to the advice of other Realtors).

So as you can see, you still have options should you decide to accept a home sale contingency.  Of course, it’s not the most ideal situation for a seller but sometimes it is a necessary evil and you should be informed to make the best decision.

The Key to the Dream Realty Group is devoted to making your transaction as smooth as possible.  If you are buying or selling in Bellingham, Franklin, Medway, Wrentham, Norfolk, Walpole, Blackstone, Millville, Mendon, Hopedale, Norton, Plainville, Easton, Sharon, Mansfield, Foxboro, Milford, Cumberland, Smithfield, North Smithfield, Burrillville, or Lincoln contact us today at 781 269 2195 or email us at info@keytothedream.com or start searching for homes now by visiting here.

 

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