We are often contacted by Sellers who have just received an offer. The price is good, but the Buyer wants the contract to be contingent on the sale of his or her own house. The question from the Seller is always the same: “Should we do this?”
Sale of house contingency
I personally do not like contingencies based on the sale of the purchaser’s current residence (often called a “Hubbard Clause”). However, it is something Sellers have to accept if they want to sell their property quickly. Most people simply do not qualify financially to buy a new house while still carrying a mortgage on their existing home.
What is a Contingency?
A contingency basically means that if a specified condition is not met, then the real estate contract may be terminated by one or both parties. In a Hubbard Clause contingency situation, if the Buyer cannot sell his or her house, then the Buyer or Seller may terminate the sales contract.
Clearly, such a contingency is in the best interest of the Buyer, as it allows them to enter into a contract to buy before they sell, and if they cannot sell, they do not have to buy.
What about the Seller?
There are certain protections that a Seller can obtain.
If the Seller is prepared to accept a Hubbard Clause contingency, this means that they will not have certainty whether the Buyers will close on the house until such time as the Buyers have contracted for or sold their existing home.
1. A Time Limit
One important provision to add into any such Hubbard Clause contingency is a time limitation. How long are you willing to keep your house off the market? Many Hubbard Clause contingencies expire by their terms between 90 and 120 days from the time the contract is entered into. At the end of this time period, either the contract can be terminated by the Seller, or the Buyer can remove that contingency.
On the one hand, you have to be realistic: you cannot put a too short of a time limit, because the Buyer may not be able to sell their home within that short period of time. On the other hand, you cannot have this open-ended. A range of between 90 and 120 days is a fair compromise between both of these positions.
2. An Early Out Clause
A Seller should also incorporate what is known as an “early out clause” into the contract. This permits the seller to continue to show and market the property, while at the same time preserving an interested Buyer who will diligently attempt to sell his own house.
This gives the Seller the opportunity to continue to market the property, and most real estate agents and brokers will be happy to assist in these efforts. If the Seller obtains another satisfactory offer, the existing Buyer will be given a period of time in which to determine whether to cancel their contract or to remove the Hubbard Clause contingency from their contract. The typical period is 72 hours.
It is important to note, however, that even if the existing Buyer decides to remove the contingency and go forward with the purchase, that Buyer must demonstrate the financial ability to be able to purchase even though their current residence has not yet been sold. If this language is not included in the real estate contract, the Buyer could remove the contingency, but nevertheless still not qualify to get financing until the house is sold, and the sale of Seller’s home will not take place.
The Sellers should also keep in mind that if an acceptable second offer is received, they cannot accept that offer until they have given the 72 hour notice to the first Buyer. Alternatively, the Seller could accept the offer as a “back up” contract, making it clear that this is a back-up contract which will not become the primary contract until the Seller gives written notice of that fact to the second Buyer.
The Seller definitely does not want to be in the position of having sold the house twice under two different contracts.
There are many more nuances to this, so consult with a qualified agent, or better yet, a real estate attorney, before making any decisions.
Thomas Babson Kane is an attorney in Glastonbury, CT, specializing in Estate Planning and Real Estate law.