The Risks of Making a Purchase Offer Without a Sale Contingency
Many home buyers worry about making an offer on a new home before securing a sale of their current one. For this reason, many buyers prefer to include a home sale contingency in their offer that gives them an out if their own sale falls through.
Buying a home with a contingency to sell is not always as easy as it sounds, however. Many sellers are reluctant to accept a contingent offer because it puts them at the mercy of the buyer selling their home first.
Does this mean you should make your offer without a sale contingency? Not necessarily. First, you need to understand the risks.
The Contingency Domino Effect
Overall, a housing market with too many contingencies is at risk of creating a chain reaction of stalled sales. You can have seller A (which is you), selling to buyer B. Buyer B is selling their home to buyer C, which makes buyer B's performance contingent on C. If buyer C cannot close, neither can buyer B—and neither can you, seller A.
In a real estate contract, a sale contingency releases the buyer from the contract if they are unable to sell their current home.
This domino effect means that purchase offers are inherently less risky if no one in the chain makes their offer contingent on a sale. Sellers, in particular, are always likely to favor an offer free from contingencies.
Why Sellers Don't Like Contingent Offers
When faced with selling to a buyer who has no contingency to sell, or selling to a buyer with a contingency to sell, which do you think a seller will choose? Which would you choose?
The process of selling a home is full of uncertainty, so sellers naturally want to remove any unpredictable elements they can. And if it's a seller's market, that ultimately gives the seller leverage to hold out for a buyer who won't add uncertainty to the process.
In some cases, the contingency contract might even allow the seller to keep their home on the market to openly try to find a backup buyer. In northern California, this type of status is called "active with a release clause." It's basically a kick-out clause that says if the seller receives an acceptable backup offer, they have the right to give the existing buyer at least 72 hours notice to release the contingency to sell or cancel the contract.
What Releasing the Contingency to Sell Means
For these reasons, it may be tempting for a buyer to make a purchase offer without a sale contingency. Doing so could mean you're able to financially qualify to buy the new home without selling your existing home. It could also mean you're willing to move forward on the belief that your existing home will close—andsimply accepting the minimal risk that it won't.
If you can't make the purchase without selling your existing home, you can't hide this fact from the seller. Contracts usually contain some sort of good faith dealings and disclosures. This means you can't withhold pertinent information from a seller. Anything that could derail the contract would be considered pertinent.
However, that doesn't mean that, after disclosure, you as a buyer might not be free to make an offer without a contingency to sell if you are willing to take a risk.
The Buyer's Risks in a No-Contingency Offer
As a buyer, your risks in making an offer without a sale contingency are twofold: legal and financial.
If you make an offer without adding a contingency about selling your current home, you could be legally responsible for not closing the transaction as promised. 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.
If you consider making an offer without a sale contingency, you should consult a lawyer and understand the risks before doing so.
The financial risk could be your earnest money deposit, liquidated damages, or some other form of compensation to the seller. In most cases, the loss of your earnest money is your biggest concern as a buyer.
Laws around earnest money in this situation can vary, so it's best to consult a lawyer and understand your risk. 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.
One thing is certain, though: a sale contingency protects your earnest money if you're unable to sell your current home.
Other financial risks for buyers include the danger of facing two mortgage payments and selling your house for less than it's worth. Without a contingency, you may feel too much pressure to sell your home even if you're not getting fair offers.
Should You Buy Without a Sale Contingency?
The choice to make an offer without a sale ultimately comes down to your comfort level with the risks involved. If you're able to handle the possibility of two mortgage payments for a time, can handle losing your earnest money, and have the ability to qualify for financing without a sale contingency, you might feel comfortable taking the risk to make your offer more appealing. Be sure you fully understand the risks before you make the offer, though.