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Buying on contingency

by Debra Gelbart on Nov 6, 2015

So you’ve made the decision to buy a new-build home (good for you!) — but first, you have to sell your current home. How can you coordinate a sale and a purchase to make sure the whole process goes smoothly and is financially feasible?

If you don’t want to wait until you sell your current home to buy your new home, you may want to consider buying on contingency, where your purchase isn’t finalized until your existing home is sold. 

More market confidence

After the housing downturn at the end of 2008, builders all but halted accepting contracts on new home construction based on a buyer contingency, explained Christine Anthony, a real estate professional with Coldwell Banker Residential Brokerage.

“Sinking home values meant that many prospective buyers were underwater on their mortgages, or would soon find themselves underwater as the market continued its downturn,” she said. But since 2013, she said, “builders have become more and more confident in accepting a contract on a new home based on a contingency, and that the risks of doing so have gone down dramatically.”

What to expect

Two local homebuilders that sometimes accept contingency sales are Shea Homes and Cachet Homes.

Shea Homes offers either 60 or 90 days (the buyer’s choice) from the day a purchase contract is signed for the new home for buyers to sell their existing home, said Ken Peterson, the builder’s vice president of sales and marketing. Between 30 and 45 percent of Shea’s buyers are those with an existing home to sell; Shea Homes requires them to make an ‘earnest deposit’ equal to 5 percent of the new home’s base price. If the existing home hasn’t sold in the specified time, all but $350 of the buyer’s earnest money is refunded, he said.

Cachet Homes requires a non-refundable $1,000 earnest payment to buy a new home on contingency, said Keith Mishkin, a real estate professional and owner of Cambridge Properties in Phoenix who works with Cachet’s buyers at Monterey Ridge in Scottsdale. Cachet also offers 60 to 90 days for buyers to sell their current homes, Mishkin said.

Advantages vs. disadvantages

Perhaps the most notable advantage of buying on contingency compared with selling your existing home before you buy, Peterson noted, is that work on your new home can begin sooner.

“You can choose your design options and upgrades right away and the new home can go into the production queue as soon as your existing home goes into escrow,” he said. “With the labor constraints homebuilders are experiencing, that can mean moving into your new home earlier than if you waited to sell your current home.”

Another benefit, Anthony said, is that individual sellers with resale homes on the market may not be as eager to accept a contingent offer on their home as a builder might be. For the regular seller, she said, contingency poses a greater risk than it does for a builder who isn’t depending on a moving date, work transfer, family disruptions or other challenges, should the deal fall through. A contingency buyer will find that “purchasing a new home is much easier when dealing with a homebuilder than with the regular resale market,” she said.

The biggest drawback for a buyer, Anthony said, is that typically, all or part of the earnest money is nonrefundable. And, she said, often there are penalties for not closing on the new home on time, “so it’s important to read the contract and understand the builder’s expectations.” Peterson said about 80 percent of Shea’s contingency buyers successfully close on their new home after completing the sale of their existing home.

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