With the market in our area continuing to perform well and prices starting to rise above the pre-recession peak, many home owners are beginning to consider cashing out their equity in their current property in order to trade up to a larger home. If you are a homeowner who bought in 2011 or 2012 near the bottom of the market crash, you could be in a particularly good position to move up. However, if you need to sell your current home first in order to purchase a new home, it’s important that you understand how contingent offers work and how to best protect your deposit money throughout the process.
If you’d like to move forward with making an offer on a home before the sale of your current property, but you need the funds from your sale in order to buy, you are writing what is called a “contingent offer”. Along with your offer paperwork, you will submit a form called a COP, which stands for “contingency for sale of buyer’s property. The COP is hugely important to the process because it sets clear timelines for moving forward and it protects you against getting into a situation where you are contractually required to move forward with a purchase, but are unable to do so because you haven’t sold your current home.
There are three main points of negotiation included in the COP. The first is the length of your contingency. Ideally, you want the contingency for the sale of your home to remain in place until you close both properties (which is often done concurrently on the same day). However, some sellers will try and negotiate that you reduce that contingency to a shorter term – they may ask that you remove your COP after two or three weeks regardless of the status of the sale of your current home. Be sure to carefully consider whether or not you are comfortable removing the COP based on your situation. If you end up removing the COP and then run into a problem that cancels or delays the escrow on your current home, you could be at risk of losing any deposit you submitted on your replacement home purchase.
The second item specified in the COP is the length of time you have available to get your current home into escrow. If your home is already in escrow at the time you make your offer, this item hold less importance. However, if you are making an offer before putting your current home on the market, this stipulates how long you have to get your home under contract. It is common for sellers to give buyers 14 – 21 days to get their home under contract. If you are unable to get your home into escrow within that time period, the sellers are allowed to cancel your contract. It’s important to note that if the sellers decide to cancel based on you failing to meet the timeline set for your own home sale, they are not able to keep your deposit as long as you have not removed the overall contingency for your home sale.
The final item noted on the COP deals with the sellers’ ability to market the home and accept backup offers while you are in escrow. The COP has an option that allows the sellers to accept your offer, but continue to market the house. If they get a better offer that is not contingent, they could then cancel your escrow. It’s important that you modify this term on the COP to prevent the sellers from having the right to basically kick you out of your sale if a better option comes in. There is a section in the COP that allows you to prevent the sellers from canceling your sale to accept a backup offer for a set amount of days. Ideally this amount of time would be the entire term of your escrow, but it’s more common for it to match the amount of time the sellers have given you to get your current home into escrow.
Buying and selling at the same time can be complicated and stressful process. However, if you understand the rights afforded to you by your COP, you can make sure that you have covered yourself against any unexpected issues that may arise!