Contingent Contracts for Selling the Buyer's Home—Contingency Sales
How to Use a Buyer Contingency Form
It's generally better to sell your existing home before buying another, but sometimes market conditions are just right to buy before you sell. Or maybe an unexpected event has forced your hand, making you pull up stakes and put your house on the market.
Homebuyers who decide to buy before selling often write contingent contracts to purchase. The contingency is that the buyer's home must sell before the buyer is obligated to complete the purchase transaction on the new property.
Contingent contracts are usually a good deal for a buyer and risky for a seller. Many state realtor associations have devised legal documents that sellers and buyers can use to address contingent contract situations and protect the rights of both parties.
The California Association of Realtors has created Form COP to deal with this situation. Many other states utilize similar forms. California procedures are discussed here. Bear in mind that your own state requirements might differ somewhat.
Purchase Contingent on the Sale of Buyer's Property
The seller will want to know the status of the buyer's sale process. It might make a difference as to whether the offer is accepted or rejected. A seller might not consider your offer at all if your home isn't even on the market yet. This gives the impression that you're not serious about selling or buying.
One of these situations should apply and be checked on Form COP or a similar state document to give the seller an idea of the status:
- The buyer's home is not yet listed for sale: You're not a buyer or a seller if your home isn't yet on the market. This tells the seller that you're just someone who's thinking about making a change.
- The buyer's home is for sale: Name the brokerage that has listed your home, the name of the multiple listing service in which it's listed, and identify the MLS number. The listing agent representing the seller will likely advise the seller to reject your offer if you're planning to sell your home without representation. It might seem unreasonable and possibly unfair, but you won't appear credible to the listing agent or to the seller.
- This property is in escrow: This is good. It effectively means that you've sold your home before buying—you just haven't closed on the transaction yet. The seller will want to know the name of the escrow company, the escrow file number, and when the deal is scheduled to close.
The Date of Closing
The date of closing on your property is vital. The seller will expect you to close by that date if the property is in escrow and you cite it when you write your offer to purchase.
You typically have the option to specify a date on the contingency agreement that's different from the actual scheduled date of closing. This is recommended, especially if your property isn't yet in escrow.
The seller then has a right to issue a Notice to Buyer to Perform if your present home doesn't sell by that date. The notice demands that you close, and the seller has the right to cancel your agreement to purchase if you can't do so.
Right of First Refusal
Part of the negotiation process for contingent contracts is whether sellers can cancel purchase agreements if they receive another offer. The seller typically retains the right to continue marketing the property, regardless of the option that's agreed upon.
Cancellation can happen in one of two ways.
- Removal of the sale contingency: This provision allows sellers to give buyers 72 hours by default to remove the contingency should another offer be received. It doesn't mean you must sell within this time, but your agreement would no longer hinge upon the sale of your own property. Removing your contingency would require that you find the funds to close elsewhere, such as by obtaining a bridge loan or liquidating other assets.
- Back-up offers only: This option doesn't let the seller kick you out of the agreement to purchase. The seller is legally bound to sell to you if you eventually sell your home within the time specified. The seller can accept other offers as a backup, however, in case your transaction falls apart. Very few sellers will accept this option, however.
Read your contract over carefully, or have a professional do so, if you're unsure where you stand with this type of clause.