We can’t tell you the amount of clients we’ve worked with lately who want to purchase a new home, but have a home to sell first in order to get the funds to buy the next one. This is pretty typical move-up buyer step, and its fantastic that homeowners have equity from owning their home for a number of years to be able to make a great down payment on their next house! Most don’t know how to make it work with timing or the purchase process and since we’ve been asked about that a lot in the last few weeks, we thought we’d just explain it all here for you, too.
What’s a contingent offer?
When you make an offer on a home, your broker will often include several contingencies that help protect you in the purchase. Some are simple – a financing contingency protects you if you can’t get the loan you’re applying for, and an inspection contingency gives you the opportunity to have a professional inspection on the property and ask the seller to make repairs or cancel the contract based on something that’s found. But when your broker refers to a contingent offer, they’re usually talking about a home sale contingency – meaning you place an offer on the home you want under the promise that you’re going to list your current home for sale and use the money you make from that sale. It also protects you in that if you’re unable to sell your home during the stated time period, you don’t have to move forward with buying the new one.
While time periods in a contract are often customized to each sale, the seller will typically want to see that your current home is either on the market already, or going on the market within 5 days of signing the contract on their home. Then, they typically want you to get that home sold within 45 days, although again that number can be adjusted based on personal needs of each buyer and seller.
What’s a Bump Clause?
Here comes the risk of making a contingent offer. You find your dream home, and you’re ready to list your current home. The seller accepts that contingent offer and you get your home on the market. You haven’t yet found a buyer for your current home – but the seller, during this time, is allowed to keep their home on the market for other potential buyers to view. If another buyer comes along who doesn’t need to sell a home to purchase, then that seller can issue you a “bump notice” – that basically states you have a certain number of days (usually five or less) to either waive your contingency or cancel the contract so they can sell to the new buyer. You can waive the contingency one of two ways – either by getting your house sold, or by finding funds to close another way. If you can’t do this, you lose out on the home and the seller can sell it to someone else.
You’ve waived your contingency. What’s next?
Congratulations! You’ve managed to find a buyer for your current home so that you can purchase the new one. From here, everything moves forward as it would in any other transaction, and the only thing left to do is figure out when you’ll be able to close on both. Typically in a contingent home purchase, your new home will close three days after the closing of your current one. For some, this can leave you with no where to live for three days. If you have family or friends to stay with or another form of temporary housing, that’s great – if not, you may need to negotiate a delayed possession with your home’s buyers that allows you to stay in your current home a few days longer after you no longer own it.
It’s all very tricky, but a good broker working with you on both sides of the transaction can really help make a contingent sale a smooth and stress-free process.