It's generally better to sell your existing home before buying another, but sometimes, market conditions are just right to buy before you sell. Other times, an unexpected event will force 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 buyers and sellers can use to address contingent contract situations and protect the rights of both parties. For this piece, the details come from the California Association of Realtors' Form COP. Many other states utilize similar forms, but keep in mind that your own state's requirements may differ somewhat.
- The contingency contract will include key dates that the buyer must honor to keep the deal intact.
- If a buyer isn't in escrow with their existing home, this will be noted on the contingency contract, and it could be a red flag to the seller.
- Sellers typically keep their homes on the market after signing a contingency contract, and the contract will determine whether or not any incoming offers remove the sale contingency.
Purchase Contingent on the Sale of Buyer's Property
The seller will want to know the status of the buyer's sale process. A seller might not consider the offer at all if the buyer's home isn't even on the market yet. This gives the impression that the buyer isn't serious about selling or buying. On the other hand, if the buyer has nearly sold the home, it could signal that the buyer's home (and by extension, the seller's home) is just a few technicalities away from officially selling.
Form COP (or a similar state document) will break down the sale process into two broad categories, with space to clarify more detail.
Buyer's Property in Escrow
If the buyer's property is in escrow, that's a good sign to the seller. It effectively means that the buyer has sold their home before buying—they 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.
Buyer's Property Not in Escrow
If the buyer's property isn't in escrow, it isn't necessarily a red flag for the seller, but the buyer will have to clarify where they're at in the process. The buyer will check a box declaring whether the home has been listed for sale yet or not.
If the buyer's home isn't listed yet, that could be a problem for the seller. This tells the seller that the buyer is simply thinking about making a change, but they haven't committed to anything yet.
If the buyer's home has been listed for sale, they will specify the name of their broker and the MLS number. If you're the buyer in this situation, you should ensure that you have a broker representing your property. 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 or unfair, but you won't appear credible to the listing agent or to the seller.
Whether the buyer's property is in escrow or not, the contingent contract will establish a timeline with key dates that the buyer must meet.
If the Property Is in Escrow
For properties in escrow, the buyer will provide the scheduled closing date while writing their offer to purchase. The date of closing is vital, and the seller will expect the buyer to close by that date.
If the Property Isn't in Escrow
For properties that aren't yet in escrow, the contract will stipulate a date by which the property must enter into escrow. As of June 1, 2020, California's Form COP defaults to 17 days after the contingent contract is signed, but the buyer and seller have the option to agree to an alternate timeline.
The first section of California's Form COP gives the buyer and seller the option to establish their own timeline. The key dates established here don't have to match the scheduled date of closing or any other timelines.
When the Seller Receives Other Offers
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.
Depending on how the contract is established, the seller can handle incoming offers in two ways:
Removal of the Sale Contingency
Under this provision, sellers with a new offer give buyers a set timeline (in California, the default is 72 hours) to remove the contingency. For the buyer, it doesn't necessarily mean that they must sell their home within this time, but their agreement will no longer hinge upon the sale of their own property. In other words, by removing the contingency, the buyer agrees to buy the home whether or not they've sold their old property. This could mean finding the funds to close elsewhere, such as by obtaining a bridge loan or liquidating other assets.
Backup Offers Only
This option essentially maintains the contingent contract, regardless of backup offers. The seller can't kick the buyer out of the agreement and force them to purchase if they get another offer. The seller is legally bound to sell to the contingent buyer—if they manage to sell their home within the original timeline agreed upon.
The seller can accept other offers as a backup, and if the buyer can't sell their home in time, then the seller can end the transaction with the contingent buyer and accept the backup offer. Very few sellers will accept this option, however, since it limits their options to sell.
Read your contract over carefully—or have a professional do so—if you're unsure where you stand with this type of clause.