Contingency Strategies for a Smooth Sale

Contingencies protect you and your buyer, but they can also sabotage a sale.

Once you've negotiated price and closing costs with your buyer, it's time to get down to the special provisions of the contract -- the contingencies -- that protect your interests and those of your buyer. As a seller, you want to ensure that the buyer's contingencies don't ruin the deal for you.

Sellers most often include in the contract two common contingencies: The purchase contingency gives you 30 or 45 days to buy your next home, and the leaseback allows you to live in your current home for a while after closing. Those provisions will help you avoid the hassle of moving twice -- first into a rental, and then into your next home. Seller Steve Vieux asked his buyer for both contingencies, as did the sellers who sold him his next home. The downside? While you're renting your former home, you're responsible for fixing anything that fails on your watch. For example, Vieux had to pay to replace a water heater.

Buyers typically request a financing contingency. If they fail to get a mortgage or loan terms agreeable to them, they can bail out of your contract and you must refund their earnest-money deposit. This could send you back to square one, looking for a new buyer. You could avoid such a delay by accepting cash-only offers, but that limits the number of buyers.

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The best strategy is to price your home so you receive multiple offers, and then you can be selective. Choose the buyer whose financing is most likely to go through. "Twenty percent down is a very warm and fuzzy feeling. Fifty percent is beautiful, and cash is great," says agent Janis Morgan.

If your house will appeal to first-time buyers, they may want Federal Housing Administration financing because it requires a down payment of only 3.5%. Be forewarned: If the home has defects that will cost a borrower of modest means too much to repair, you will have to ante up the cost of repairs or FHA will refuse financing for that home.

If you're anxious to settle and move on, consider passing up a higher offer with a financing contingency in favor of a lower one without it, says agent Bob Bower. Don't agree to a financing contingency unless the buyers present a preapproval letter from their lender (or a "certificate of eligibility," if they will seek a VA loan) with their offer.

Most buyers will want a home-inspection contingency. Purchase contracts generally say that sellers will turn over homes in "normal" working condition (unless the property is being sold "as is"). If the inspection turns up a problem that affects the home's habitability, you'll have to repair it. If the inspection turns up other, lesser issues, the buyer may ask you to take care of those, too. You can protect yourself from excessive costs by setting a limit upfront on the contingency.

Patricia Mertz Esswein
Contributing Writer, Kiplinger's Personal Finance
Esswein joined Kiplinger in May 1984 as director of special publications and managing editor of Kiplinger Books. In 2004, she began covering real estate for Kiplinger's Personal Finance, writing about the housing market, buying and selling a home, getting a mortgage, and home improvement. Prior to joining Kiplinger, Esswein wrote and edited for Empire Sports, a monthly magazine covering sports and recreation in upstate New York. She holds a BA degree from Gustavus Adolphus College, in St. Peter, Minn., and an MA in magazine journalism from the S.I. Newhouse School at Syracuse University.