A Contingency Contract may be used when you currently own a home and need or want to sell it in order to purchase your next home. Such a contract is conditioned on the sale and closing of your present home. If your home does not sell and close by the date specified in the contract, you are off the hook -- the contract is dissolved and you are entitled to a full refund of your earnest money.
Contingency contracts usually contain a "kick out" clause. This means that if someone else makes an acceptable offer on the same home you have chosen, then you have a short time, generally 24 to 48 hours, to make a decision. That decision may be to allow your contingency contract to be "kicked out" or, in the alternative, you may enter into a contract amendment agreeing to remove the contingency language and agree to come to closing on the date in the contract, irrespective of whether your home has sold.
Most buyers understand the above, but may not be aware of the several things that follow:
When it comes to the sale of brand new homes, the majority of builders are agreeable to the idea of entering into a contingency contract. But, when it comes to the sale of used homes, most sellers are very much against the thought of accepting a contingency contract. I believe the reason for this is because a contingency contract does not represent the finality the seller needs. The seller does not know whether to start packing or to keep his home ready to be shown some more. Since a builder does not need to have the home sell so that he can get on with his life, he is much more amenable to a contingency contract.
A contingency contract interferes with the listing agent's continued marketing of the home. The contingency contract causes there to be less showings. Other agents see the contingency status and may have buyers to whom they choose not to show the home because they are uncertain whether it is truly available.
Most sellers of resale homes don't want to be bothered by your contingency contract. If a seller is does agree to one, it is very likely you will not get the seller's best price and terms.
I am often asked by buyers whether they should do a contingency contract on a resale home. I tell them that, as a contingency buyer, the seller may not want their contingency contract and that they are not likely to get the seller's best price and terms. I go on to explain that would I only encourage them to make a contingency offer if they can honestly represent that they fully expect to remove the contingency in the event the seller receives another acceptable offer. In this case, I require that my clients have been pre-qualified by a lender as being able to handle the financing of the new home without the prior sale and closing of their current home.
There are many ways to creatively work out interim financing of this type. The solution often results in the deferral of a second mortgage payment, and the avoidance of unnecessary closing costs and mortgage insurance.