Sale contingencies: Your key to buying and selling a house at the same time
Buying a home in a red-hot real estate market can often feel like an up-hill battle. Between the low inventory, sky-high demand and stiff competition, house hunters are faced with historically high real estate prices. According to the National Association of Realtors, median home sale prices rose 18.4% in March 2021 alone.
With homes routinely selling above asking price, what’s a prospective homebuyer to do? Well, if you already own a home, you likely have a bunch of untapped equity you could put toward a new purchase. By financing either a portion or all of the transaction with the proceeds from your own home sale, you might be able to afford a lot more home than you realize.
That’s where a sale contingency could come in handy. If you’re not familiar with them, then you’re not alone. They’re a largely underused financial tool when buying a house, but they could help you secure a bigger mortgage to outbid the competition.
Rest assured, though, there are a ton — and we mean a ton — of logistical issues that you need to work out. That’s one of the reasons so many people don’t take advantage of sale contingencies.
You’ll need a step-by-step guide to walk you through the sale contingency process so you don’t get in over your head. As luck would have it, that’s exactly what we have here, so read on.
How sale contingencies protect homebuyers
You might be asking, “what is a sale contingency, anyway?” Basically, it’s a contract term stipulating that, as the buyer, you need to sell your home first before you can close on your new home. No sale, no agreement.
The idea is that you’ll put the proceeds from your home sale toward your purchase. By doing so, you can head off any lender concerns about you overtaxing your finances by carrying two mortgages at once. Don’t have 20% for a down payment? Not to worry, your lender could still approve your financing with this type of contingency attached to your purchase contract.
Sale contingencies also cover you in case you can’t sell your current home. In a worst-case scenario, you simply walk away from your new purchase, minus whatever non-refundable expenses you’ve paid.
Even better, with those added funds, you can afford to spend more on a house. And that means you could have more flexibility to outbid other buyers when you find your dream home. Suddenly, this competitive real estate market doesn’t seem so bad, huh?
There is a catch, though. Sale contingencies aren’t all that common — a May 2020 National Association of Realtors report found that sale contingencies only accounted for 6% of all contract settlements. As such, an offer with this kind of contingency could stand out for all the wrong reasons. You could put yourself at a competitive disadvantage compared with offers that don’t include any extra contingencies. That's why many people who go this route choose to up their offer beyond the asking price, and maybe even a little more to offset any concerns about the contingency.
It’s always a good idea to consult a real estate agent before deciding on using a sale contingency. In a hot market, you want to come in with as few contingencies as possible to make your offer competitive against the other bidders. Sale contingencies are ideally suited for a buyer’s market where you hold more negotiating power over the seller.
10 steps to buying a house on a sale contingency
Buying a house on a sale contingency is a long process, with more than a few wrinkles to consider. That’s why you need to map out a plan to avoid any complications or unpleasant surprises. Here are the steps to follow, and you’ll find more detail on each below:
- Get your finances in order
- Seek out expert assistance
- Prepare to sell your home
- Stage your home
- Put your home on the market
- Find a buyer for your current home
- Create a competitive offer
- Stay on top of the closing process
- Keep a leaseback agreement in your back pocket
- Still no luck? Consider a bridge loan
Step 1: Get your finances in order
The first order of business is to make sure you’re in a financial position to buy a new house. In this regard, a sale contingency situation is really not all that different from any other home purchase. The biggest to-do items include:
- Calculate how much you can afford to spend each month.
- Create a budget for your home search.
- Figure out how much your monthly mortgage payments will be.
- Reach out to a real estate agent to get a sense of how much you can list your current home for.
- Talk to a loan officer to see how the addition of your home equity might increase the size of the loan they’ll extend you. Be sure to mention you’ll be using a sale contingency.
- Once your finances are cleared, request a preapproval letter from your lender.
Step 2: Seek out expert assistance
Sale contingencies can be logistical nightmares for the unprepared. You’ll want three knowledgeable real estate professionals in your corner to handle anything the process throws your way:
- Real estate agent
- Loan officer
- Real estate attorney
Real estate agent
Your real estate agent will draw up your offer, give advice and serve as a go-between with you and the seller’s listing agent. They can also help you stage and list your current home so you can meet the terms of your sale contingency.
In many cases, you can work with the same real estate agent for both the buy and sale side of the process. However, be careful if you use one of the many popular real estate listing sites to set up a showing. You could be legally attached to your assigned agent for that particular property as soon as you schedule your walkthrough. Other agents may be hesitant to work with you on that house (other properties are another story, though) because the original agent would be entitled to a cut of the commission. In that scenario, you might have no choice but to use a dedicated agent for each of your transactions.
Your options may also be limited if you have signed a buyer’s agency agreement. These binding documents outline expectations for both the buyer and the agent. And in many cases, they preclude homebuyers from working with other agencies.
If you want to have one real estate agent handle everything and coordinate both the purchase and sale of property, then just be sure to reach out to them first. Let them schedule showings for any listings you come across to avoid any potential conflicts. Also, thoroughly look over any agreements they send to you so you fully understand the terms of your relationship. Don’t hesitate to ask questions if you’re not 100% clear on everything.
Loan officers play a critical role in this process, getting you the mortgage you need to purchase your new home. As noted, they’ll send you a preapproval letter that tells sellers you’ll be able to secure financing without an issue — just as long as that sale contingency is met. Your loan officer will help you prepare all the documents needed to process your mortgage as well as close on your new house.
As mortgage lending experts, loan officers can also provide valuable advice and insight throughout the homebuying journey. If you run into a roadblock — say, you’re not able to sell your current home as quickly as possible — your loan officer may provide other options to keep the deal alive.
Real estate attorney
Be sure to have a real estate attorney look over any paperwork you need to sign, including your offer, to check that you’ve covered all of your bases. Anytime new legal documents pop up, ask your attorney to read through them and flag any potential concerns.
It’s very important to keep these different players in sync so you can quickly respond to anything that might come up. Send regular updates to everyone so they know how things are progressing — not to mention flag any delays or obstacles that are slowing you down. When trying to buy a house in a competitive market, the last thing you want is to lose out on a home because you were waiting for your agent to draw up an offer or your attorney to review the contract.
Step 3: Prepare to sell your home
You want to do everything you can to ease any concerns the seller might have about your sale contingency and make your offer more appealing. That doesn’t always have to mean throwing more money at them, though. If your home is already on the market when you submit your offer, that’ll show sellers you mean business.
So, ideally, even before you go house hunting, you’ll have your current home listed and you’ll be fielding offers of your own. Of course, if you let your house sit on the market too long — say, several months — that might make the seller wonder if you’ll actually be able to sell your home in time.
In any case, you should start packing up your belongings in anticipation of a move. Also consider getting a jump on any repairs you might need to make to close the sale on your home. Time is of the essence when working with a sale contingency, so don’t delay the closing process because of last-minute maintenance work you could have done earlier. For instance, real estate agents will often recommend having your furnace inspected beforehand since that is such a common sticking point during the home inspection.
Step 4: Stage your home
You don’t need to be an interior designer to make your home stand out on the real estate market. Follow these tried-and-true home staging tips to reel in prospective buyers:
- Declutter! Pack away knick-knacks, books and other loose items that might make your home seem messy or just plain overstuffed.
- Put away your personal items. You want to help house hunters envision themselves living in your home. That’s hard to do if you have family photos plastered all over your mantle, shelves and walls. Personal items can extend to clothing, toiletries and kitchenware as well. Keep your home as spare as possible while retaining a warm and inviting living space.
- Prioritize high-traffic areas like your master bedroom, kitchen and living room. That’s where people are going to be spending most of their time once they move in, so it’ll be a focal point of the showing, for sure.
- Brighten up your space. Keep your curtains drawn and blinds open to let in as much natural light as possible. If that’s not enough, turn lights on around your house to make darker rooms seem more appealing.
- Give your home a deep cleaning. Dust, dirt and grime are a real buzzkill for house hunters, so keep your place spick and span throughout the sale process.
- Rent a storage unit. You’ll probably need extra space to store all of your possessions, including furniture like dressers, end tables and loveseats.
- Consider boarding your pets. You’re about to have a lot of strangers walking through your home — sometimes on short notice. Will you be able to get your dog or cat out of the house for hours at a time? If not, you might want to think about boarding your pets — or better yet, asking a friend or relative to look after them for a little while.
When staging, try to take a good, hard look at your home through the eyes of a potential buyer. What would raise a red flag if you were considering a move? Prioritize those jobs first. If those issues jump out to you, then they’ll probably catch the eye of homebuyers as well.
If you have photos of the listing when you originally bought the place — even better. Those will offer plenty of food for thought to mull over as you stage your home. After all, the previous owner must have done something right to convince you to buy the place. Do not simply reuse those images in your own listing, though. In all likelihood, the previous listing agent will own the rights to them. And believe us when we say that agents are extremely protective of their photography and will not hesitate to accuse people of copyright infringement if their images are repurposed without permission.
Step 5: Put your home on the market
Ideally, you’ll have your house listed for sale before you go searching for a new home. Having a buyer lined up would be even better. That’s not always going to be the case, though. You may find your dream home before you have a chance to put your new house on the market. As a result, Steps 5-7 outlined here could occur simultaneously or you may start by putting in an offer on a house and then getting your home on the market.
Regardless of which comes first — listing your home or submitting an offer on a new house — you need to act fast. If you go house hunting before doing anything else, just know that the standard contract your real estate agent uses will likely stipulate that you need to list your home within five business days of the seller accepting your offer. That’s not necessarily set in stone, but any additional delay could make the seller question how serious you are.
You have very little time to get all of your ducks in a row, so hopefully you’ve already laid the groundwork to get your house on the market. That includes bringing in a photographer to take pictures of your home and put it in the best light (literally). If you hold off on prepping your home, you could be scrambling to meet that five-day deadline.
A standard sale contingency contract may give you 30 days to sell your home and then another 30 days to close on it. That’s not a whole lot of time to find a buyer, so you may need to list your home at a lower price than you’d like to get people in the door.
Be sure your real estate agent understands the situation with your sale contingency when putting your home on the market. Prospective buyers should be made aware that you will only complete the sale if your own purchase goes through without a hitch. Put the right language in your sale contract to avoid any confusion or misunderstandings.
And if you can get your property in escrow, that’s even better. Taking this extra step will show sellers you are 100% committed to holding up your end of the sale contingency.
Step 6. Find a buyer for your current home
The further along you are in the sale process of your own home, the more likely a seller is to seriously consider any offer you put on the table. Your sale contingency won’t seem like such a gamble if you already have a buyer lined up for your house.
If you do put in an offer first, though, you’ll have no time to lose finding a buyer of your own. The countdown to close on your current home starts as soon as the seller accepts your offer on the new house and the sale contract is signed and executed. That means you have a mere 30 days to find a buyer of your own. If your home’s not gaining traction on the market, consider ways to make it more appealing to house hunters:
- Lower your asking price.
- Change up your staging.
- Boost your curb appeal.
- Schedule more open houses.
- Reshoot your listing photos.
- Revise your listing info.
That’s why it’s recommended you start the listing process first, so you have time to feel out the market and find a buyer who will meet your preferred asking price. Otherwise, with the clock running down, be prepared to take less than you hoped for on a sale. That doesn’t mean you need to settle for a loss, but your No. 1 priority should be meeting the terms of your sale contingency rather than getting the most money from a seller.
Step 7: Create a competitive offer
Once you’ve found the right home for you and your family, it’s time to submit an offer to the seller. Like we said earlier, sale contingencies can put buyers at a competitive disadvantage. All things being equal, sellers will almost certainly choose an offer with fewer strings attached.
Don’t worry, that just means you might have to find other ways to make your offer more appealing. The most obvious option is to outbid other buyers and go above the asking price of the home. You could also put up more earnest money beyond the standard 1%-2% of the purchase price.
Other options include agreeing to pay the sellers’ closing costs, waiving other contingencies or negotiating the closing date of the home. Not all of these avenues are recommended, mind you — it’s never a good idea to waive inspection contingencies — but they are available.
Step 8. Stay on top of the closing process
Buying a house is stressful. So is selling a house. Put them together, and you have a whirlwind of anxiety to deal with. It’s all too easy to overlook important steps in either process because you’re trying to juggle too many distractions. Be sure you’re doing your due diligence when it comes to closing on your new home, though.
That means staying on top of inspections, appraisals and walkthroughs so you don’t get blindsided by an unexpected issue. You should also anticipate all of your closing costs, including origination fees, title insurance and appraisal fees. You’re going to need those funds on hand or in escrow to cover the final expenses before the property can change hands.
Scheduling your closing date can be a bit tricky with a sale contingency. You want it to land after you finalize the sale of your current home so you can put those proceeds toward your new purchase. But if you set the date too far out, you could be left without a place to live. Try to keep those two dates as close as possible to minimize any extra expenses you might take on booking an extended-stay hotel or a short-term apartment rental.
Step 9: Keep a leaseback agreement in your back pocket
If the purchase of your new home is dragging on with no end in sight, you may need to buy yourself more time on the sale side. That’s where a leaseback agreement can come into play. How does it work? Essentially, the buyer of your current house agrees to let you continue living there as a rent-paying tenant until you’ve closed on your new home.
It probably goes without saying that not all homebuyers are going to be on board with this plan, so treat it as a last resort. Don’t include it in the terms of your sale agreement unless you absolutely need to. In a pinch, though, it can get you out of a pretty sticky situation.
Step 10: Still no luck? Consider a bridge loan
Striking out with a sale contingency? Depending on how competitive your local real estate market is, getting sellers to agree to these terms could be extremely difficult. You may think you’ll just have to wait until the market settles down to find your dream home. But you’re not out of options just yet.
Bridge loans can help you float two mortgages at once without overextending your finances or driving away lenders. In many cases, your lender will extend you a loan based on the value of your current home, which you can then use for the down payment. Once you sell your house, you’ll have the funds to repay the loan. Lenders may also combine both of your mortgages into one larger loan, but it’s less common.
Buying a house on a sale contingency can seem daunting — and rightfully so. There are a ton of logistics to sort out, and synchronizing a purchase and sale so every step coincides at just the right time takes some advanced organization skills.
But it’s totally doable. You just need expert support to guide through each step in the process. Assemble a team of real estate rockstars — a loan officer, a real estate agent and a real estate attorney — so you stay on the right track.
We won’t sugarcoat it: Sale contingencies can be tricky to manage. But if you’re ready to buy a new house, they may just be your best option to secure a mortgage while outspending the competition.