How sellers can benefit from reverse contingencies

Key insights

• Sellers may find themselves in a tight spot if they sell their property but haven’t yet found a new home to purchase.
• To avoid this anxiety, sellers may consider adding a reverse contingency to their purchase agreement.
• In a reverse contingency, the seller adds a clause saying that the home’s sale is contingent on their purchase of a new property.

Worried about not having housing during the time between selling your current home and buying a new one? Here’s how using a reverse contingency can help sellers ease their minds as they list their home for sale.

What is a reverse contingency?

When there’s a shortage of homes for sale, sellers typically rejoice. After all, the simple dynamics of supply and demand dictate that in a low-inventory market, sellers can benefit from shorter time on the market and increased sales prices.

Of course, sellers who need to buy another home have the same challenge as every other buyer looking for a property in their preferred location and budget. Naturally, this can cause anxiety for sellers who aren’t sure they’ll be able to find an acceptable new home before their current home is sold.

That’s where a creative option, known as a “reverse contingency,” can come into play. In a reverse contingency, sellers insert a clause into the purchase agreement that makes their home sale contingent on finding another home to buy. This is the opposite of a buyer’s contingency clause, which makes a home sale contingent on whether the buyer can sell their home.

When should sellers use a reverse contingency?

Let’s say you receive a very attractive offer on your home, but you haven’t yet found another one to buy. In this case, you can consider adding a reverse contingency clause into your purchase agreement.

Your REALTOR® can help you with the exact language, but in essence, the reverse contingency gives you a period of time to try to find a new home before you are legally bound to close on the sale of your existing home. In short, you get the advantage (and relief) of knowing that your home is under contract, and some extra time to look for a new property.

If you find a home during that period that suits your needs (and your offer on that home is accepted), your contingency will be removed and you’ll move towards closing the sale of your own home. If you don’t find a home during that time, you may be able to:

• Cancel the purchase agreement and walk away from the deal.
• Negotiate a longer contingency if the buyer is willing.
• Negotiate for a longer path to closing, so the sale moves forward and you still have time to continue searching.

Note: When making the decision to pursue a reverse contingency, consider not relying on stats or news stories about the market as a whole. Real estate is hyper-local, and so is buyer demand. Your Realtor can walk you through the interest for homes like yours and together, you can determine if a reverse contingency is the right call.

Alternative options to reverse contingencies

If a reverse contingency doesn’t feel right, there are other seller-friendly options available for sellers who are concerned about finding a home to purchase in time.

Transitional housing

Some sellers opt to arrange short-term or transitional housing, which allows you to sell in a strong market while taking the time you need to find — or build — your perfect house. Common transitional housing options might include a short-term rental, an extended stay at a hotel or staying with friends or family for a month or two.

Home equity loan solution

Most homeowners plan to use the proceeds of their home sale to fund the down payment on their next property. Those who haven’t yet sold their first home may worry about their ability to fund their future property. Today’s lenders are understanding about this predicament and some offer home equity loan solutions*, where homeowners can fund their down payment on the assumed equity of their existing property. When their home is sold, they can pay the lender back and the loan is canceled.

The right team

Selling a home can be stressful. But with a little time, creativity and the right team in place, you can gain the flexibility and freedom needed to find your ideal home.

Reach out to Edina Realty or your agent to help guide you on how to properly time your home sale and purchase.

*Not all buyers will qualify. Prosperity Home Mortgage, LLC does not offer financial advice. This information is provided for informational purposes only and does not constitute legal, tax, or financial advice.

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