Wed. May 25th, 2022
is-a-home-sale-contingency-clause-always-necessary?-here-are-your-options

Home listings have been in short supply for several years now across the U.S., leading to bidding wars in many of the major markets. To succeed in getting a seller to consider your offer, you need to work in advance with your real estate agent to assess the best bargaining tools to entice the seller to move your offer to the top of the list.

For instance, getting preapproved for a mortgage is imperative in the 2022 tight market. Cash offers or flexibility in choosing a closing date can also be attractive enticements to a seller.

But one of the most influential bargaining tools is eliminating contingency clauses, especially the seller contingency clause, also known as the home sale contingency.

A home sale contingency clause is an agreement written into the contract that says if you are unable to sell your current home by a certain date — making it financially possible for you to purchase the new home — then you can walk away from the contract, and your earnest money will be returned.

Eliminating this important contingency can be tricky, but it may be the only way to get your offer accepted in a competitive market.

We spoke with Karla Ballenger, partner and real estate consultant with the Raines Group in Columbus, Ohio, to understand the pros and cons of home sale contingency clauses, and to review alternative workarounds that may entice the seller to accept your offer while keeping a home sale contingency in place.

a person signing a seller contingency clause.
Source: (Masjid MABA / Unsplash)

What is a contingency clause?

Let’s begin by looking at the “what” and “why” of contingency clauses.

A contingency clause in a real estate contract states a specific condition that must be met in order for the contract to be finalized. If the condition is not met, the clause allows the buyer or seller using the contingency to withdraw from the contract without any penalty.

Contingency clauses can protect both the buyer and seller from being tied to the contract if some glitch arises for either party.

There are several contingency clauses typically found in a real estate contract:

  • Appraisal contingency: This contingency allows you to walk away from the deal without penalty if you’re using a mortgage and the appraisal comes in lower than the asking price.
  • Financing contingency: Even if you are preapproved for a mortgage loan, you may run into a problem getting a loan approved for a specific property. Or you could run into issues because something major changes with your finances during the loan approval process, such as losing your job or needing to take on a car loan. The contingency allows you to walk away without penalty if you can’t secure financing to buy the house.
  • Inspection contingency: This grants the buyer the right to have a professional home inspection, and then allows them to renegotiate the price, ask the seller to complete repairs (neither of which the seller is obligated to do), or back out of the contract entirely if the inspection reveals more dramatic issues.

“The financing approval and the inspection contingency are first-level contingencies,” Ballenger explained. “You generally see those in a normal market.”

“The home sale contingency adds another layer that a seller would have to take into consideration when evaluating an offer. With the inventory being as low as it is, most of the offers that you’re getting — better than 90% of them — do not have home sale contingency clauses in them.”

Contingency clauses can benefit both the seller and the homebuyer, giving each of them an out if the deal cannot be finalized for specific reasons — but they can also be deal killers.

The most important thing you can do is to sit down with an experienced real estate agent and discuss your options. Here are some pathways to consider.

Why would you want a home sale contingency?

If you currently own a home, the home sale contingency allows you to put an offer in on a new home, while you are in the process of selling your current home. In the event you cannot sell your current property, you won’t be faced with the dilemma of getting trapped with two mortgage payments.

It’s important to note that most contingencies have a deadline. That means even if the seller accepts a home sale contingency as part of your offer, you have a limited time to sell your home. If you do not meet the deadline, you might still be able to purchase the new home, but you may have to pay on both mortgages for a while.

Your loan officer will be able to advise you on financial options, should you run into that situation.

A person discussing the seller contingency clause.
Source: (Filip Rankovic Grobgaard / Unsplash)

Why would a seller reject a home sale contingency?

A home sale contingency presents a dilemma for the seller. Once a seller has accepted your offer, they have to take their house off the open market.

If you can’t sell your home within the time period designated in the contingency clause, and you decide to walk away, the seller is forced to begin all over again to market their home.

In a market where a seller is having difficulty finding buyers, they will be much more open to locking in a buyer, even if it means being forced to wait to close the deal.

But in a seller’s market, a seller doesn’t have any reason to wait. There are usually buyers lining up for a chance to bid on the house.

“The sellers are in the driver’s seat right now,” Ballenger explains. “But because it’s been a seller’s market for a long time, the buyers are very savvy, too. You’re getting buyers coming to the table with offers with very clean terms and conditions.

“This is the best situation for the sellers because the buyers are presenting their highest and best to begin with,” she adds. “Whereas in the past, the buyer would try to negotiate more, the buyer now realizes in this market that there’s not a tremendous amount of room for negotiation.”

There are two pathways you as a homebuyer can consider: either eliminate the seller contingency clause, or offer the seller a workaround that may encourage them to agree to retaining the home sale contingency clause.

Eliminating the home sale contingency clause: Options to consider

Your first step is to discuss the home sale contingency with your real estate agent. Your agent will know the situation in your particular region and can advise you whether or not you can be successful in getting your offer accepted if you include the contingency.

“Today, the average house is getting at least three offers,” Ballenger says. “So, when competing against other offers in the market that we’re in, sellers are not selecting the offer with the home sale contingency.”

If your agent determines a home sale contingency is off the table due to a low-inventory market or with a particular seller, your best bet is to look at other options.

Sell and rent

Considering how fast homes are selling, you can always sell your current home first and rent while you negotiate for your next property.

“Because the competition is so fierce when purchasing a home, there are a lot of people who have sold their homes to be able to be in a position to buy quickly,” Ballenger notes. “That definitely puts them in the best position when putting an offer down on a new home.”

Bridge loan

You can apply for a bridge loan to help you pay for both mortgages in the short term.

If you are considering this option, you should have an in-depth conversation with your loan officer to ensure you would qualify and to understand the terms thoroughly.

Lower your current home’s price

If time is of the essence, your best option may be to lower the price on the home you are selling. In the current high-demand market, this may make the home sale contingency unnecessary.

Trade in your home

You can also choose to trade in your home through a homebuying service such as HomeLight Trade-In.

HomeLight will buy your current home so you can avoid the stress, risk, and hassle of buying and selling at the same time.

We will then work with your real estate agent to list the home. Some trade-in companies (including HomeLight) allow you to pay rent to stay in your current home while you are finalizing your purchase of the next home if there is a closing delay.

There are advantages to the trade-in approach. For instance, with an offer in hand, you will know exactly how much money you will have to work with to purchase the new home.

By eliminating the home sale contingency, you’re far more likely to have your offer accepted and to be able to close within your preferred timeline.

A person reviewing the seller contingency clause.
Source: (DocuSign / Unsplash)

Keeping the home sale contingency clause: How to sweeten the deal

If you and your real estate agent determine the home sale contingency is necessary for your situation, there are other benefits you can bring to the deal to encourage your seller to accept your offer.

Waive the appraisal contingency

The appraisal is a critical factor in a real estate deal because it determines whether the buyer can get the financing they need to purchase the home. By waiving the appraisal contingency, the seller has less concern about the deal falling apart.

However, if you need a mortgage loan that includes a financing contingency, it might be pointless to waive the appraisal contingency because you are still dependent on the appraisal to get the loan.

That said, you may be able to use this powerful enticement.

“I think that buyers in this market need to have some extra cash at hand,” Ballenger noted. “That allows them to put additional funds forward to cover an appraisal gap, if needed.”

The settlement contingency

Sometimes a seller will be more open to a settlement contingency than a home sale contingency.

A settlement contingency means you already have a contract on the home and are waiting for it to close. This is a little less risky for a seller, but it still includes a contingency that your current home’s deal will close, so you are still protected.

The kick-out clause

You can add a kick-out clause to your home sale contingency, which allows the seller to continue to look for a buyer.

This eliminates risk for the seller because they aren’t forced to take the home off the market. The good news is if a new buyer puts in an offer, you still have some control. You can remove your contingency, allowing your transaction to move forward, or you can decide to walk away and let the seller accept the new offer.

The escalation clause

Let’s say you have a home sale contingency with a kick-out clause, and your seller gets another offer. If you have an escalation clause, you are basically telling the seller that if you are outbid, you will escalate your offer by $X amount, hoping you can top the new offer.

It is important to have a price cap to limit how high your offer can go. But if a buyer comes in above your highest offer, you may lose out to the new buyer.

NOTE: The seller can only invoke the escalation clause with proof of a bona fide buyer, which means providing a signed offer from another buyer showing that the price offered exceeds your offer.

Extend the closing time

You can consider offering a longer closing time to the seller. This may be an advantage to both the buyer and the seller.

If the seller is looking for a new home as well, it gives them time to negotiate their next purchase, while you are looking for a buyer for your home. It gives everyone a little breathing space.

Rent back to the seller

What happens if you sell your home quickly, and the seller still has not finalized the deal on their next purchase? Letting the seller know in advance that you will rent back their house to them in the event they have not found their next home is another way to grease the wheels with the seller.

NOTE: All contingencies have deadlines. Even if you agree to rent to the seller for a period of time, it can be limited to a reasonable amount of time, so you don’t get stuck in limbo while the seller takes their time finding a home.

Accept a suitable property contingency

Just as a homebuyer wants to make sure they sell their current home before jumping into the next one, the seller wants to make sure they have a place to land after their home is sold. A seller may add a suitable property contingency to the property listing, letting buyers know that the sale of the property is contingent on their ability to find a new home.

“The suitable property contingency provides the seller with a safety net,” Ballenger explained. “If they’re putting their home on the market, they want to make sure they have suitable housing in order to move forward and perform on the contract. The seller will specify a timeline, whether it’s 30 days, 60 days, or 90 days.”

Ballenger said that, fortunately, she has not been in a situation where a seller hasn’t found suitable housing within the stated time period. “Ultimately, if the seller is happy with the price terms and conditions that they’ve agreed upon, the buyer is just going to have to be patient and be a little bit flexible with allowing the seller to have that time,” she said.

A final word

Every real estate market is different. Even within the same city, custom and practice may be far different in the urban areas, compared to a new housing subdivision or an outlying, less populated area. This is why it is so important to rely on a trusted real estate agent to guide you in your decision making and help you write your strongest, best offer first.

Header Image Source: (Samuel RC / Unsplash)

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