The phrase catch-22 has become a catch-all (no pun intended) for situations with no easy solution and conflicting priorities. The thing is, just as the cliché is overused, it’s also a misnomer. There are very few real catch-22’s. There are just a lot of difficult situations.
Buying a new house when you also need to sell your current one is one of them. Do you sell yours first, potentially leaving you temporarily homeless? Do you do both concurrently and then rush to sell yours once you found a new one? Do you have the means to briefly carry two mortgages, or would you need a bridge loan, which can be expensive, to help?
There is no one right answer, but remember this, you are not alone. According to the National Association of Realtors, 67 percent of buyers in 2019 are not first time buyers. This means they are likely to be in this very predicament.
There are a number of financial solutions. You could get a bridge loan to help cover the costs of temporarily carrying two mortgages, or you could get a home equity line of credit from your current home to cover the costs of your new home. These short-term options are expensive, and thus risky and could lead to carrying a second mortgage. For this reason, a contingency clause relating to the sale of a current home is one of the five most common contingency clauses found in a Purchase and Sale Agreement. How does it work? Read on to learn more.
Contingency Clauses are Common in Real Estate
Because real estate transactions involve a lot of money, banks, and a transfer of ownership, there are numerous contingencies to protect both the buyer and the seller. Four of the common contingencies are:
- a home inspection to ensure the property is as reported;
- an appraisal to ensure the home is worth the selling price;
- a financing contingency in case the lender refuses to approve a mortgage loan;
- and a title search to make sure the title is free and clear to be sold.
Veterans of the home buying process are familiar with these contingencies. If any of them falls through, the sale does not proceed. But there is a 5th common contingency that is less understood: A home sale contingency clause. This happens when the buyer needs to sell his or her current home in order to have the money to buy a new home. This contingency makes the top five list, but it’s not as common as the others since sellers do not like it. It’s easy to see why. For buyers, it provides assurances they have a new house to go to and time to sell their current house. But for home sellers? Why would a home seller agree to take their home off the market on a contingent offer that may fall through?
Making a Contingency Offer Attractive
It’s easy to see why sellers are not big fans of home sale contingencies, but it’s also easy to see why they are not uncommon: Most home sales are not made by first-time home buyers and sellers don’t want to limit the pool of buyers. To understand how home sale contingency clauses affect real estate transactions you have to consider the home in question and the market. Here are two common scenarios:
- If you are buying your dream home in a slow real estate market with high interest rates and fewer potential buyers, sellers will be much more willing to accept this clause.
- If you are buying a house in a hot market with low interest rates, and/or steep competition in your given area or price range, the sale contingency clause will hinder you. The sellers in these markets might also have a new home to move into and they will be impatient.
For buyers who fall in the second scenario and need the sale contingency clause, buying a house will be harder, but not impossible. Options that could make an offer more attractive include offering more than the asking price, offering a larger Earnest Money Deposit than requested, letting the sellers choose the closing date, picking up the sellers closing costs and limiting the time period for your house to sell.
Buyers also need to show that they are doing their due diligence. Just as the Earnest Money Deposit is a good faith payment signaling that a buyer is serious about a given house, buyers with a house to sell need to show sellers they are working hard to sell their current house. This includes having the house listed for sale before making an offer on a new house, allowing the real estate agent selling your current home to communicate with the seller’s real estate agent, and getting a mortgage pre-approval letter before making an offer. Less traditional routes include a personal letter to seller explaining why you want to purchase the home (read letters here).
When this is not enough, sellers will ask for a kick-out clause, also sometimes called a 72-hour clause. This allows the seller to leave the home on the market and then notify the potential buyer if another offer, without a home sale contingency, comes in. The initial potential buyer then usually has 72 hours to complete the purchase or back out.
There are also technicalities to be aware of. If you have an FHA mortgage and are getting another FHA mortgage, there are situations where you can apply for an eligibility rule exception to qualify for a new loan while carrying your old loan. Make sure to get educated on your individual situation.
Making Move-in Day A Reality
No doubt about it, buying a new house when you also need to sell your current one is not easy. The trick is finding the right situation that will work for both the buyer and seller. Some people are able to find buyers for their current home who don’t need to move in right away, and sometimes sellers are willing to provide more time to buyers in exchange for better terms. It’s all about creating a scenario that allows you to transition from one home to the next without huge expense or difficulty.
Own Up knows that the homeownership journey is confusing, whether you are a first time buyer, or in this case, an existing home owner needing to sell your current home before buying a new one. Own Up believes that education is the key to empowerment. Call us, and we can walk you through the home buying process.