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Simar Singh | 06 May 2022

Understand the Brief Concept of Home Sale Contingency

Understand the Brief Concept of Home Sale Contingency

You often have come across a situation at the time of buying a property where you may encounter a buyer who tries to buy your home with a home sale contingency plan. So basically, when the seller is supposed to sell their current home so that they can afford a new house, the home sale contingency comes into existence. People juggle between buying and selling, so they choose to include a home sale contingency plan in their offer. 

Following in the complete information on what a home sale contingency means for buyer and seller. 

How does a home contingency work?

The process is a kind of an offer that homeowners make at the time of buying a new home that's dependent on selling their current home. In this given situation, if the home gets sold by the specified date in the contingency, the purchase of the contract moves ahead without any disturbance. In case the home fails to be sold at the given period of date, the buyer and seller can extend the deadline ahead if agreed by both parties. If both fail to agree, then the contract gets cancelled, and the buyer walks away from the sale with the deposited money received during the initial period. 

The benefit of sale contingency to the homeowners is that the burden of paying for two houses at a single time gets decreased. Not only does the plan relieve homebuyers from the stress, but it also simplifies the buyer’s financial obligations, which can ultimately lead to improvement in getting approved for a new mortgage. 

Types of home sale contingency 

There are two types of house sale contingencies

  1.  A sale and settlement contingency 

  2. A settlement contingency 

Let's understand these concepts in-depth, but before let's understand what the kick out clause is. 

A kick-out clause is a clause that provides the seller with some kind of relief from being engaged in a house sale contingency agreement. It shows the seller that they still possess the right to continue to market their property. If the potential buyer comes along in the given future, then the original buyer will have a specific time to remove the contingencies. If the buyer fails to remove the contingencies, the seller has the liberty to back out of the contract and move ahead with the new buyer. So a kick out clause acts as a compromise between accepting a contingency contract or not. 

1. Sale and settlement contingency 

This type of house sale contingency is used at the time when a buyer has not yet accepted the offer on their current home. In this situation, the seller is reluctant to accept the sale and settlement contingency as the buyer is only at the initial stage of selling the house. In-sale and settlement contingency includes a ‘kick out clause’ in order to protect the seller. The clause enables the seller to keep the marketing of their property on and wait for their original buyer to handle their own home sale. In one scenario where the seller receives a better offer to buy their house, the seller is obligated to notify the original buyer first. If the buyer does not remove the contingency and close within the allotted time period, the seller has the liberty to move ahead and accept the better offer. The best part is, even if the would-be buyer does not remove their sale contingency at the given time, they would still receive the earnest money deposited way back in this scenario. 

2. Settlement contingency 

Settlement contingency is used at the time when the buyer has successfully accepted the offer on their property and is about to close or settle. As the buyer is currently engaged in the process of completing their own home sale, there are chances of less risk involved with this contingency. So the perk is that the settlement contingency has more chances of getting accepted by the seller even in the case where they stop marketing their property and wait for the buyer to finalise the wholesale of their existing home. 

Home sale contingencies- Worth or Not?

Home sale contingency for sellers 

In the case of sellers, the home sale contingency is not the ideal choice. It is because there is no guarantee involved that the current home of the buyer will end up selling in the exact given period of time. Despite the fact that the seller has the liberty to market their home during a contingency period, the home can be labelled at the time as an ‘under contract .’And this will work as a detraction for potential buyers who are looking to waste their time on a property that may sell to someone else. At any given time, sellers might not accept the contingent offer, so they tend to avoid the option that their buyer will cancel the sale even if it's last minute. 

Home sale contingency for buyers

For many buyers, this contingency is a sort of dilemma. Home sale contingency for buyers ensures that their investment in their new home is safe. Nevertheless, a home sale contingency can make their offer less competitive as the buyer will not be refunded for a home inspection or appraisal even if they fail to sell their home at the given time. Because of the risk associated with this contingency clause, the buyer may have to buy the house for a higher price to make up for the risks. 

Factors to look for if you are a seller 

If you are looking to sell your house and receive an offer with the home sale contingency, then you must lookout for the following factors- 

  • The strength of the offer in terms of pricing, financing, appraisal, and home inspection contingencies 

  • For how long is your home on the market

  • Is there a possibility or any other offers that are likely to come in 

  • Check the prior pricing, financing, and condition of the current home of the buyer 

  • Check if the buyer’s home is already on the market but in case it's not, then how fast can they get it on the market.

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