How to use a contingent offer to trade in your current home for your next one
Americans have more equity in their homes than ever. But using that equity toward a down payment on your next home isn’t as simple as you would hope, and can involve significant risk. My aim in this post is to help you learn how to protect yourself by using a home sale contingency (aka “contingent offer”) to buy your next home, or to consider other options that might make sense for you if you’re looking to move.
How it works
First things first! Start by meeting with a real estate agent to understand your current home’s market value. Be sure you understand what you’ll need to do to get your home market-ready. By starting this preparation early in your home search, you’ll be well positioned when you find a home to buy.
You’ll also need to be pre-approved for a home loan. Your realtor will help you find a local lender who understands your situation and can get you pre-approved.
Now you’re ready to start shopping for homes! When you find the right home, you’ll write an offer with the necessary contingencies, including a home sale contingency. If your offer is accepted, you’ll likely have the following steps and timeline, though all timelines are negotiable:
Schedule an inspection of the new home.
List your current home for sale on your local MLS (multiple listing service) within 5 days of offer acceptance on the new home (Yep…that fast! And yes, also negotiable!).
You typically have 45 days from the day your offer was accepted before you must accept an offer on your own home. During this time, if the seller receives another offer that they would like to accept, you may receive a “bump notice,” which requires you to choose whether to back out of the agreement or move forward without your home sale contingency. This is fairly uncommon because most buyers don’t both to look at homes that under the “contingent” status.
Once you receive an acceptable offer on your home, be sure the closing date is within 30-60 days from the date you accept it (if the closing is outside of this window, you can move forward as long as the seller of the home you are buying gives you permission). The offer you accept cannot be contingent on the sale of that buyer’s home (imagine the stress of waiting for the dominos to fall!).
Once you’ve closed on the sale of your current home, you will typically close on your new home within 1-2 business days (sometimes even the same day). Pro tip: request a rent-back from the buyer of your home up front so that you can stay in your home a few extra days and avoid being in limbo during the brief period between the two closings. This avoids an additional move during a stressful time.
What the contingency does not take into account
One glaring omission from the home sale contingency is the anticipated list price of the buyer’s home. The agreement does not require a buyer or buyer’s broker to provide information about the value or anticipated list price of the buyer’s home. So it’s up to your agent and you to make sure they have a home that will sell as well as a broker with a solid track record.
Pro tip: if you receive a contingent offer on your home, ask the buyer’s agent to provide you as much info as possible about the property that the buyers will need to sell. Request a market analysis that clearly shows that their expectations surrounding price and value are aligned with the market. If they can’t sell the home, you’ve lost valuable market time and, potentially, other offers.
There are some alternatives for individuals who need their home equity in order to purchase their next home, but who—for one reason or another—aren’t able to rely on a contingent offer.
Sell, rent, buy: The simplest alternative is to start by selling your current home, rent while you search for a new home, then buy. The upside to this approach is that you can know exactly how much money you will take from your home sale before you start looking seriously for homes to buy. The obvious downside is that you add a move to the process.
Use a home equity line of credit: If your income is enough to qualify for your new home loan without selling your current home, your lender may be able to offer you a home equity line of credit to use for a down payment on a new home. The upside to this approach is that it allows you to make a more compelling offer on a home, and helps you avoid a second move in the process. Once you’ve purchased your next home, you can take your time preparing your current home for the market without the added pressure of a contingent offer. You can also move out of your current home before putting it on the market, which is preferable over occupying the home while it is listed. The downside is that you use significant leverage and incur some additional loan costs as a result. If you are averse to risk, this approach may not be right for you. You will likely hold two mortgage for a few months in this scenario.
If you have questions, or if I overlooked something you think folks should know, please get in touch or comment below!