The Pros/Cons of a Home Sale Contingency for a Buyer
The good & the bad of a home Contingency For buyers.
Most buyers need to sell their existing home in order to purchase a new one. This is especially the case for home buyers that are looking to trade up. The home sale contingency gives buyers the time they need to sell and mitigates their risk to ensure they don't lose their deposit.
In doing this however, it is shouldering the burden of risk on the seller. By accepting a home sale contingency, the seller is losing marketing time and possibly other opportunities in selling their house. It essentially becomes a little of a gamble for the sellers. They are gambling that the buyers house will sell quickly. It’s also a process that the seller’s have very little control over. For instance, the seller can’t make a buyer stage their house a certain way to make it more attractive or force them to reduce the price. They are stuck in a holding pattern doing a little hoping and praying.
The Pros for Homebuyers are:
- Avoiding owning 2 Homes & paying 2 Mortgages
- Being able to "lock'' in the next house so they don't end up homeless
- No risk to the Buyer’s deposits should they not be able to sell their house.
The Cons for Homebuyers Are:
- They will still need to move forward & pay for home inspections, Bank fees as well as appraisal fees. Should the deal fall apart, none of those costs are reimbursed to the buyer.
- A buyer may potentially need to pay more for a property then compared to if they were to make an offer without the Home Sale Contingency. The reason for this is that the seller is taking on more risk of a buyer’s ability to perform. Therefore, they will want to be compensated for that risk.
- Should it be a multiple offer situation then chances of winning the bid are greatly decreased unless the buyer pays far over and above the next competing offer.
In my opinion, I do not believe it makes a lot of sense for a Buyer to take the risk of agreeing to an offer without a Home Sale Contingency if they can’t purchase the next house without selling the current one. If that buyer ends up not being able to perform, then they could lose their entire deposit!
It amazes me that some real estate agents out there will actually suggest this as an option. It’s a lot easier to gamble when it’s someone else’s money!
A homebuyer does have options. And it’s important to examine those options as they start the process.
Many homeowners who are looking to buy their next house may be able to afford to carry both mortgages. Remember that being able to “afford” both houses and be approved by a bank can sometimes mean two separate things… Especially for us self employed folks!
If a soon to be buyer can afford and be approved for the next house then when their old house sells, they can take those proceeds and 'recast'' their new mortgage after the old one closes. Recasting just means that you are paying a lump sum of principal and the bank adjusts your payment accordingly to reflect that principal payment. That being said... If all goes well, then they may just be able to close on both properties the same day.
Often times a home buyer that is looking to "trade down'' has a lot of equity in their home. They may be able to secure a Home Equity Line of Credit (HELOC) on their current house to buy the next house. This HELOC would be paid off once they sold their original house. This can be an inexpensive way to eliminate a Home Sale Contingency.
Another option available is to use a program like our 'Buy Before You Sell" program. In this program, we will actually stand behind you and pay your current mortgage payment for up to 12 Months while you are comfortably in your new home. You pay us back when the property sells. There are certain restrictions and availability that applies to be in a program like this.
The point is as a home buyer with a house to sell... you have options.
Some options may make more sense than others. If you are thinking about buying a new home and need to sell your current house first, then let’s chat and evaluate all your options.
You can reach me at 617-480-2600 or by email at [email protected]