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Contingency Contracts: Friend or Foe?

In the world of real estate, there are few things more intimidating than the dreaded contingency contract. Though they can be confusing at times, I assure you contingency contracts are nothing to be afraid of. In fact, they can be quite beneficial to both the buyer and the seller when used correctly.

Let’s begin by discussing exactly what a contingency contract is.  A  contingency contract is what you use to buy a new home when you need the equity from your current house to make the purchase. It is exactly the same as a standard contract except for the fact that it includes an addendum for the sale of another property by the buyer. For that reason, we will focus on the content of the addendum for this article. It is important to note, however, that ALL parts of the contract can affect the seller’s willingness to accept an offer.

The first question many people have is , “When can I submit a contingency offer?” The answer: Whenever you want. Will a knowledgeable seller take a contingency offer before your current house is under contract to sale? Probably not. For that reason, it is important that your first priority is getting your current house under contract. In this case, it is generally a good idea to leave yourself a fair amount of time before closing so that you have time to negotiate a contract on your next purchase. It may also be wise to include a lease back to give yourself a couple of days to move.

Ok. your current house is under contract. Now what?! The best thing you can do is get a Realtor to help explain to you how a contingency contract works. There are too many scenarios to cover in this article. Suffice it to say that the wording in the addendum protects the buyer if the contract on their current house falls through.

On the other hand, it also protects the seller by allowing them to continue showing the property. IF another offer is made on the house, though, the original buyer has “dibs.” That is to say that they have an opportunity to put down more earnest money (the amount can be negotiated) to give up their contingency and continue forward with a standard contract. If the buyer chooses to do this, the seller must stay with their offer even if the second offer was much higher.

 This may sound bad for the buyer, but generally by this point in time you have a pretty good idea if the sale of your previous house will go through. At this point, if you’ve played your cards right, The sale of your previous house closes, the purchase of your new home closes, the new house is yours, and everyone is happy.

It is important to note that seemingly minute details in a contingency contract can be responsible for the success or failure of the whole deal. For this reason, I STRONGLY advise you to contact a Realtor if you find yourself in this situation. They have the experience and the knowledge to help you through this process and to make sure that you are protected.

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