Home Buying Without a Contingency to Sell an Existing Home
What is the Risk to Buying a Home When Also Selling?
Buying a home with a contingency to sell is not always as easy as it sounds. It's not selling your existing home that is generally the problem, it's the reluctance of some sellers to accept your purchase offer as a contingent sale. If you want to make your head really hurt, think about what happens when you buy a home that is contingent on your home selling, and the buyer for your home is buying with a contingency to sell that buyer's home.
It's the domino effect. You can have Seller A (which is you), selling to Buyer B. Buyer B is selling Buyer's B's home to Buyer C, which makes Buyer B's performance contingent C. If Buyer C cannot close, neither can Buyer B nor you. But if Buyer C is selling to Buyer D, you could have more problems. Because if Buyer D flakes out, the whole chain falls apart.
A seller who accepts an offer under a domino sale like this is taking a greater risk than accepting an offer with only one contingency to sell because there are more ways the transaction can blow up. There are situations and types of real estate markets that might make it very difficult for a buyer with an existing home to sell to buy another home under a contingency of purchase. Because faced with selling to a buyer who has no contingency to sell or selling to a buyer with a contingency to sell, which is dependent on a third party's performance, which do you think a seller will choose?
Which would you choose?
Further, the Contingency of Purchase contract might allow the seller to keep that seller's home on the market and to openly try to find a backup buyer. In northern California, this type of status could be called Active with a Release Clause. It's basically a kick-out clause that says if the seller receives an acceptable backup offer, the seller has the right to give the existing buyer 72-hours notice minimum to release the contingency to sell or cancel the contract.
What does releasing the contingency to sell mean? It depends on the verbiage and contractual obligation. It could mean financially qualifying to buy the new home without selling the buyer's existing home. It could also mean moving forward on the belief the existing home will close and, if it doesn't close for some reason, the buyer's earnest money could be at risk for non-performance.
Contracts usually contain some sort of good faith dealings and disclosures. This means you can't withhold pertinent information from a seller. If a buyer needs to sell a home in order to get the cash to close escrow, this important fact should be disclosed. A buyer most likely has a duty to disclose this fact. However, after disclosure, the buyer might be free to make an offer without a contingency to sell if the buyer is willing to take a risk.
What is the usual risk?
The risk is the buyer could be legally responsible for not closing the transaction as promised if the buyer's home does not close. Without a contingency to sell, there is no "out clause" for the buyer, apart from normal contingency periods for such things as appraisal, home inspections or a loan contingency. Buyers who consider this maneuver should obtain legal advice as well, and not rely on this article nor their real estate agent as a basis to buy a home when selling without a contingency for that sale.
The financial risk could be the buyer's earnest money deposit or liquidated damages or some other form of compensation to the seller. In my experience, the question often comes down to the earnest money deposit -- will the buyer be entitled to a receive a refund of the earnest money deposit upon cancellation?
That's another long article. Basically, the bottom line is do the sellers want to be free to sell to another buyer or do they want to fight over the earnest money deposit? If the buyer wants the deposit and the seller does not want to release it, most escrow companies in California, for example, will allow the parties to cancel the transaction, leaving the deposit in dispute. However, both parties need to sign the cancellation.
If one party refuses to sign the cancellation, and let's say that stubborn party is the buyer, the seller can find her hands tied. She can't be under contract to two buyers at the same time, so the seller might need to take legal action to get a release of contract. In these instances, the way this dispute is resolved, well, the seller typically releases the earnest money deposit. Which leads us back to the question: is the buyer's deposit at risk? That's a question for the buyer's lawyer to answer.
At the time of writing, Elizabeth Weintraub, BRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.