How Does a Contingent Home Sale Work?

By Emily Southey | 11 minute read

Contingent house sales are extremely common, and they affect both buyers and sellers. Understanding how contingencies work and what kind of clauses to expect is important for both parties involved in the transaction. 

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What Is a Real Estate Contingency?

In real estate, a home sale contingency refers to a circumstance or a set of circumstances that must be met for the home sale to go through. Contingencies are often referred to as conditions or conditions precedent. Contingencies are usually added to purchase agreements by buyers. The specific contingencies added vary but commonly include a home inspection condition (meaning the transaction is conditional on a satisfactory home inspection) and a financing conditioning (that the buyer’s financing must be approved in order for the home sale to go through). If any contingencies are unmet, the buyer has the right to terminate the contract. 

The main purpose of contingencies is to protect the buyer. However, it’s wise not to include too many contingencies in a purchase agreement as it risks putting off the seller (this is especially the case in a seller’s market). Although you want to protect yourself, you also want your offer to be attractive, and the more conditions it has, the less attractive it is likely to appear.

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How Do Contingencies Work in Real Estate Transactions?

Contingencies can be added to offer letters when you make an offer on a home. Buyers can work with their REALTOR® to determine which contingencies are worth including (or necessary to include) if they want to purchase a home. Home inspection and financing contingencies are the most common and are fairly standard in purchase agreements. Once you decide which contingencies you want to include, your REALTOR® can help you draft an offer letter that clearly outlines these conditions. From there, the seller will review your offer and either accept it, reject it, or make a counteroffer. Sometimes, sellers will negotiate the inclusion of certain conditions or the terms of these conditions. For example, in the case of a home sale contingency that stipulates the buyer’s current home must be sold for the transaction to go through, the buyer will likely include an expiration date (that is, if their current home isn’t sold within 60 days, the seller has the right to terminate the contract). In such an instance, the seller might wish to negotiate the expiry date down from 60 days to 30 or 45 days. Ultimately, the buyer and their REALTOR® may have to negotiate with the seller to settle on which conditions will be included in the final purchase agreement. Any contingencies that are included in the agreement must be met for the real estate transaction to be complete.

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The Home Sale Contingency 

Beyond home inspection and financing contingencies, the home sale contingency may be particularly important to some buyers. This condition comes into play when a buyer already owns a home. If this is the case, they may think it necessary to include a home sale contingency in their offer letter to the seller. A home sale contingency usually stipulates that the real estate transaction will not go through before the buyer sells their existing home (that is, the offer will only become firm once the buyer’s property is sold). This condition then allows a buyer to walk away from a transaction if they are unable to find a buyer for their current home. Sellers do not typically love home sale contingencies as there is no guarantee if or when the buyer will successfully sell their home. For this reason, home sale contingencies are usually more popular in a buyer’s market than in a seller’s market. In fact, sellers may outright reject a home sale contingency in a seller’s market because they know that they will be able to find another buyer without this restriction. 

Keep in mind that when buyers submit an offer with a home sale contingency, the contingency usually has an expiration date. If the buyer has failed to sell their home by the expiration date, the seller has the right to terminate the contract. While this contingency protects the buyer, it is risky for the seller and can significantly delay the sale process, especially if the buyer hasn’t sold their property by the expiry date and the seller is forced to re-list and market their home. For this reason, a REALTOR® might advise a buyer to ask for a later-than-normal closing date rather than include a home sale contingency, which still gives them more time to sell their house without alienating the seller. Another option is to obtain a bridge loan that might give the buyer financial means to buy a new home before their current home is sold.

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The Two Types of Home Sale Contingencies

There are two main types of home sale contingencies in real estate transactions: the home settlement contingency and the sale and settlement contingency. The former is used when a buyer’s home is already under contract, the home inspection has been completed, and the sale is progressing toward a closing date. Home settlement contingencies are usually quicker, which makes them more attractive to sellers. Meanwhile, the latter type of contingency is used when the buyer’s home isn’t under contract and they are still marketing their property. As there is no guarantee of how fast the property will sell, sale and settlement contingencies are usually less attractive to sellers. 

Home Sale Contingency Considerations for Buyers

Home sale contingencies are designed to protect buyers by giving them the time they need to sell their existing home before buying a new (often more expensive) one. By including a home sale contingency in your purchase agreement, you can avoid the financial burden of owning two homes and paying two mortgages at the same time. Generally speaking, home sale contingencies can vastly simplify the homebuying process, making for a more seamless real estate transaction. That said, although home sale contingencies eliminate the risk of a buyer having to pay two mortgages simultaneously, buyers still must be prepared to cover the other costs of homebuying. For example, buyers will need to allocate some of their budgets to home inspections, appraisals, legal fees, and bank fees — and these expenses won’t be refunded if you are unable to sell your property on time and the deal falls through.

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Home Sale Contingency Considerations for Sellers

Home sale contingencies are generally much riskier for sellers, as there is no guarantee that a buyer’s home will be sold or when. Even if the purchase agreement allows the seller to keep the property listing active and accept other offers, the home may be listed as “under contract” or “contingent status,” which could be less attractive to buyers. Buyers are less likely to visit a home (let alone make an offer on one) that is under contract as they don’t want to risk falling in love with it and never having a chance to buy it. Therefore, before agreeing to a home sale contingency, experts recommend that sellers try to determine the following: 

• If the buyer’s home is already on the market (if the home hasn’t even been listed yet, this could be a red flag and usually translates to delays);
• If the buyer’s home is priced to sell (your REALTOR® can do a comparative market analysis to help you determine if the buyer’s home is priced appropriately, giving you insight into how quickly it will sell);
• The length of time that the buyer’s home has been on the market (another red flag is if the buyer’s home has been sitting on the market for a long time); and
• The average time other homes in that area are sitting on the market (if the average home in the buyer’s current neighbourhood is sitting on the market for 30 days or less, then the odds are high that the buyer will be able to sell their home fast. But if the average time is 60 or 90 days, this could mean trouble). 

One final piece of advice for sellers regarding home sale contingencies is to include a “kick-out clause.” Such a clause states that the seller can continue to market their property and accept other offers. If an attractive offer comes in that makes the seller second-guess the original buyer, they can give the buyer a specified amount of time (for example, 72 hours) to remove the home sale contingency from their offer and move forward with the sale. If the buyer chooses not to remove it, the seller then has the right to back out of the contract and accept the offer from the other buyer. 

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Other Common Types of Real Estate Contingencies

Though navigating home sale contingencies is important, it’s also imperative that buyers and sellers understand the other types of contingencies commonly included in real estate contracts. From home inspection contingencies to financing contingencies, check out this list of common conditions below.   

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Home Inspection Contingency 

A home inspection contingency is standard in many offers as it makes the transaction dependent on a satisfactory inspection. In other words, it allows the buyer to cancel or withdraw their offer if a home inspection reveals unsatisfactory results, such as a problem with the home. 

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Financing Contingency

A financing contingency is another important and common type of real estate contingency. This condition stipulates that the real estate transaction will only go through if the buyer’s financing is approved (in most cases, this means that the sale hinges on the buyer’s ability to obtain a mortgage loan from a mortgage broker or lender). Therefore, it protects the buyer in the event that they do not qualify for a mortgage after making an offer. Financing contingencies usually include a time frame that the buyer has to get approved for their mortgage. Time frames vary but are typically five to 14 days from the date of the offer.