You're selling your home and an offer comes in contingent on the buyer selling their home. Should you accept that offer?
Like all good legal answers - - maybe, but maybe not.
What is a Home Sale Contingency?
A Home Sale Contingency is a provision in a contract that conditions a buyer's obligation to purchase a property on her ability to sell her existing home. Many buyers are selling property to buy another property, but not all buyers require such a contingency. Some buyers have the financial wherewithal to buy a property without having to sell an existing property. A Home Sale Contingency is usually in place when a buyer MUST sell their existing home to buy the new home.
Who assumes the risk if the buyer cannot sell their existing home?
A Home Sale Contingency is all about shifting the risk of a buyer not being able to sell his home. If there is a Home Sale Contingency, then the seller is accepting that risk since the buyer has the right to cancel the deal if he cannot sell his home. On the other hand, if a contract does not have a Home Sale Contingency, then the buyer is assuming the risk of her inability to sell her existing home.
Pros of a Home Sale Contingency
- You have a contract on your home! If you are eager to sell your home, a contract with a Home Sale Contingency is still a viable contract and in many cases are successfully closed. In a buyer's market, any deal is better than no deal.
- Buyer may be willing to pay more. Home Sale Contingencies are not favored by sellers so a buyer may be willing to pay a bit more for the property if a seller agrees to the contingency.
- Risk may be minimal if the buyer is realistic regarding her sale. A seller presented with a Home Sale Contingency should poke around a bit and see how realistic the buyer is in terms of her sale. Is the house priced competitively? Is there equity in the property and, therefore, room for the buyer to negotiate with her buyer? How long has the property been on the market? Have there been prior contracts that have fallen through midstream? If so, why? These are all factors a seller should explore and consider when accepting a contract with a Home Sale Contingency.
Cons of a Home Sale Contingency
- It allows a buyer to terminate the contract deep into the transaction leaving a seller stranded. This is especially true if the contingency is based on the buyer CLOSING on his sale, not just entering into a contract to sell his existing home.
- The seller assumes a risk over which she has no control. Even though a seller has an interest in the timely sale of the buyer's home, the seller has no legal right to intervene in that transaction. This leaves the seller with no way to manage or mitigate the risk of the buyer's home not selling.
- The seller's ability to close is delayed. The transaction will effectively remove the property from the marketplace, putting the seller at a disadvantage in terms of the timing of the sale should the buyer eventually invoke the Home Sale Contingency and cancel the contract.
What should a seller do?
Of course, each case is unique and needs to be assessed based on the merits of each situation. However, if a seller is inclined to accept a contract that includes a Home Sale Contingency, it is best to include a “kick-out” clause. A “kick-out” clause is a provision that allows the seller to continue marketing the property. If the seller receives an acceptable offer, they can invoke the “kick-out” clause which gives the buyer a short period of time (two or three days) to either waive the Home Sale Contingency and proceed to a closing or cancel the contract, in which case the seller can now enter into a contract with the new buyer.
“Kick-out” clauses are fine, but once a property is under contract (with or without a Home Sale Contingency), it will deter many buyers from making an offer knowing it is unlikely their offer will ever be accepted. That is more psychological than legal, but then again 80% of real estate purchases are driven by the emotions and not the intellect (but that is a topic for another blog post)!