Buyers making an offer on real property have to consider many unpredictable issues. Contingencies are a way for prospective buyers to protect their earnest money and cancel a closing if the circumstances do not align with their initial expectations.
Financing, inspection and appraisal contingencies are common. Buyers may also sometimes include a sale contingency in the offer they make. What protection do buyers derive from a sale contingency?
The buyer may need to sell their current home
People who already own a home may want to upgrade due to a child on the way. They may also want to downsize once the nest is empty or as they prepare for retirement.
Frequently, buyers rely on their accumulated equity as part of their purchase power in a residential real estate transaction. A sale contingency allows them to make an offer based on their available financing and the estimated fair market value of the home they currently own. If a seller accepts an offer that includes a sale contingency, the transaction doesn’t move forward until the buyer successfully sells the home they currently own.
Sale contingencies often lead to a month or longer of downtime between when the seller accepts the offer and they finally schedule the closing. In scenarios where buyers cannot sell their home in a timely fashion or where the market shifts and they cannot acquire the capital they anticipated, the sale contingency added to their offer allows them to cancel the transaction without endangering their earnest money.
Including the right terms in a purchase offer and understanding the implications of different contingencies can protect people during real estate transactions. Both buyers and sellers may need help reviewing documents and customizing them for optimal protection, and that’s okay.