Hi folks, Scott Parman, your buyer specialist. Today I'd like to expand on the commonly misunderstood topic of contingency contracts. Specifically, let's discuss what a contingency contract is, how they work, and what it means to you as a home buyer.
A Contingency contract is when a seller accepts a buyer's offer to purchase their home, but agree that the purchase is conditional upon the buyer's current home selling first. The idea of the contingency is to protect someone who is selling and then buying from being stuck owning two homes at once. Also, many buyers would not qualify for financing on two homes at once, so a contingency affords them the opportunity to make a contract to purchase their next home without selling and moving out of their current home into temporary living quarters.
First, the process to request a contingent contract is simple. You write an offer through the normal process, but you include an additional contingency document as an addendum, meaning that it is an integral part of the initial contract. This addendum has two options, one informs the seller that the buyer's current home is under contract, and the second informs the seller that the buyer's current home is NOT under contract already.
The first option, informing the seller that a buyer's home is under contract, is the most desirable. Most sellers will consider this as a solid offer for their home as long as their agent advises them that the buyer's current contract looks solid. The contingency document offers protection for both buyer and seller if the buyer's original contract falls through before closing. If this happens, the contract can be cancelled by either party, or modified if both parties agreed. That means as a buyer, you don't risk owning two homes. As a seller, you can get your home back on the market immediately if necessary.
The second option, informing the seller that a buyer's home is not under contract, is a less desirable option for either party. On the buyer's side, it seems great, you lock down a home, but take time to get yours sold. However, during the time you're selling your current home, if it isn't under contract, the seller has the option to accept another contract and serve you with a "kick-out" notification. This means to secure the home you want, you have the option to waive the contingency. Otherwise you lose the home to the new buyer. From a seller standpoint, there is almost no reason to accept this option. A buyer is asking them to take their home off the active market when they have no buyer or closing date for their current home. In their minds, why not just leave the home on the active market, then when your home is finally under contract, you'll come back around if they haven't sold yet. In the meantime, they have the benefit of securing another solid buyer for their home.
Ultimately, what does this mean to you as a homebuyer? Simple, unless you have the approval to hold two mortgages (one for your current home and one for the next one) at the same time or are a renter, it's unlikely you'll be able to write a contract on your next home until your current home is under contract. If you own a home, the first step is always to get it in shape and on the market before you start looking for the next home.