Success Means Planning Ahead

If you're thinking of making an offer contingent on selling your current property, don't wait until you've found your "dream home" before putting your house on the market.

Most everyone who sells a house to buy another one faces this dilemma: How do you buy a new home before you've sold the one you live in?

When you make an offer with a sale contingency, escrow doesn't close until your current house is sold, so a sale contingency can be an appealing way to handle the transition between homes.

But sale-contingent offers are unpopular with sellers, because accepting one means taking on risk. While waiting for your house to sell, a seller can miss out on other, possibly better, offers. And if your house doesn't sell within a reasonable time, a seller may have to start from scratch finding a new buyer.

Here are some options for handling the financial transition from one home to the next — with and without contingencies.

Strategies for Making a Sale-Contingent Offer

Find a buyer for your home. This is the most common strategy. Generally, a seller will be more willing to accept a sale-contingent offer if your current home is already in escrow, or if it's at least listed for sale and priced competitively so that it will sell quickly. 

Include a release clause. Sellers who are willing to consider a sale-contingent offer usually want the purchase contract to include a release clause, which allows the seller to keep the house on the market. If another buyer makes an acceptable offer, you'll be notified to remove the sale contingency — usually within 72 hours — or lose the house to the second buyer. If you choose to back out of the contract rather than release the contingency, you'll lose any money you spent investigating the property, such as fees for inspections.

Offer more. Some sellers may be willing to take on the extra risk of a sale contingency in exchange for a higher offer.

List your current home with a purchase contingency. With a purchase contingency, you find a new home before closing on any offers you receive on your current one. If you don't find a new home by an agreed-upon date, you (or the buyer) can cancel the contract without penalty. Some buyers, though, won't be willing to assume the risk of an open-ended closing date and a revocable contract.

Contingency-Free Strategies for Selling and Buying

Putting a contingency on your offer to buy may seem safer than selling first and buying later. But you're in a much better bargaining position if your offer is free of contingencies. Here are two common options.

Sell with a rent-back provision. Sell your house first, and negotiate for a provision that after closing you can rent it back for a time while you find and buy your new home. You'll be able to buy at a more competitive price because the seller of your new home will assume no extra risk. This is also the safest option financially — and most likely the least costly. However, many buyers won't have the flexibility to offer a rent-back provision, so it limits the pool of buyers for your home.

Apply for a bridge loan. If you qualify for a bridge loan, it will cover the transition for you. Drawbacks include risk — a bridge loan is essentially another mortgage — and higher interest rates. When you complete the sale of your home, the proceeds pay off the bridge loan.

If you're thinking of buying and need to sell your current home first, don't wait until you find a new home to discuss your options with your real estate agent. At that point, it's often too late, and you'll lose out on the home you'd like to buy.