What is a home sale contingency?

For many homebuyers, a major source of stress during their real estate transaction is coordinating the sale of their current home with the purchase of their new home. Juggling both buying and selling isn't easy, so some people choose to include a home sale contingency in their offer on a new home.

A home sale contingency is just one type of contingent offer that you can make to ensure you don't get hamstrung trying to time buying and selling a home at the same time. A contingency clause is a useful tool for homebuyers for holding onto their earnest money, but not every seller is happy to see it.

How does a home sale contingency work?

There are many types of contingent offers in real estate. Buyers can submit an offer with an appraisal contingency, a financing contingency, a title contingency, or a home inspection contingency. But the home sale contingency is known for being particularly useful (but also, at times, vexing for the seller).

A home sale contingency lets homeowners make an offer on a new home that's dependent on selling their current house. If their house sells by the date specified in the contingency, the purchase contract moves forward without a hitch.

If their house doesn't sell by the specified date, the buyer and seller have the option to extend the deadline if they both agree to do so. Otherwise, the contract will be canceled, and the buyer can walk away from the sale with their earnest money deposit in hand.

Home sale contingencies help homeowners avoid the burden of paying for (and owning) two houses at one time. They also help simplify the buyer's financial obligations, which can improve their chances of getting approved for a new mortgage.

There are two specific types of home sale contingencies: a sale and settlement contingency and a settlement contingency.

Sale and settlement contingency

This type of home sale contingency is used if the buyer hasn't accepted an offer on their current home yet. Sellers tend to be more reluctant to accept this riskier contingency since the potential buyer is only in the beginning stages of selling their own home.

Before accepting a sale and settlement contingency, the seller's real estate agent may reach out to the buyer's agent to review their listing and determine how long it may take to sell the buyer's home.

Settlement contingency

This type of home sale contingency is used if the buyer has already accepted an offer on their property, and they're on their way to closing. Since the buyer is already in the process of completing their own home sale, there may be less risk associated with this contingency. As a result, a settlement contingency is more likely to be accepted by the seller, even if requires them to stop marketing the property as they wait for their buyer to finalize the sale of their current home.

What to know about the kick-out clause

To help protect the seller, a "kick-out clause" is usually included in a sale and settlement contingency. This clause allows the seller to continue marketing their property while they wait for their original buyer to handle their own home sale.

If the seller receives a better offer to buy their home, they must first notify the original buyer. If the buyer does not remove the contingency and close within a specific time period (usually 72 hours), the seller can go ahead and accept the better offer. On the bright side, even if the prospective buyer doesn't remove their sale contingency in time, they would still get their earnest money deposit back in this scenario.

The kick-out clause is a great tool for sellers to use when accepting a contingent offer. Even if the seller is having trouble fielding competitive offers for their home at first, it would be a shame to have a better offer come in after having accepted an offer with a home sale contingency on it and not having the wiggle room to consider it.

Should buyers use home sale contingencies?

For sellers, a home sale contingency isn't ideal, for a few reasons. There's no guarantee that the buyer's existing home will end up selling in time. Even if the seller is allowed to market their home during the contingency period, the house may be labeled as "under contract," which may detract potential buyers who don't want to waste time on a property that may sell to someone else.

Essentially, sellers take on a certain amount of risk when they accept a contingent offer, even a common contingency like one tied to the sale of the buyer's home. In a hot market, they have even less reason to consider this risk as they weigh multiple offers.

Therefore, for buyers, home sale contingencies present a sort of dilemma. They do help buyers ensure that their investment in their potential new home is safe and secure. However, a home sale contingency could make their offer less competitive because of all the strings attached. Not to mention, the buyer will not be refunded for things like the home inspection and appraisal if they can't sell their home in time.

Last but not least, the buyer may have to buy the house for a higher sale price to "make up" for the risk associated with the contingency clause.

How to buy without a home sale contingency

So is it possible for buyers and sellers to avoid home sale contingencies with no downside? If you work with Orchard, you can get many of the benefits of a non-contingent contract. For homeowners looking to buy their next home, we help you buy your home before you sell, no strings attached. With this certainty, you can make a competitive offer on your new home without a home sale contingency.

Your other options include trying to line up the sale of your old home with the purchase of your new one; having enough money to be a cash buyer and not worrying about carrying two mortgages; and selling, moving into a rental, then moving again once you close. Not impossible options -- but they're hardly the best case scenarios.