If you’re planning to buy or sell a property, you’re probably familiar with the standard contingencies included in most real estate contracts. These contingencies are designed to protect both buyers and sellers from unexpected circumstances that could derail a transaction. However, one contingency that you may not be familiar with or are starting to see more frequently is the replacement property contingency.
Over the past few years, this term has become more common in real estate transactions, especially for sellers worried about finding a new home. In this blog post, we’ll explain a replacement property contingency, how it works for buyers and sellers, and why it’s becoming more popular in today’s real estate market.
What is a Replacement Property Contingency?
A replacement property contingency clause can be included in a real estate contract that allows the seller to back out of the transaction if they cannot find a suitable replacement property within a specified timeframe. This contingency is often used by sellers concerned about being left without a place to live after selling their home.
How it Works for Sellers:
If you’re selling your home and would like to include a replacement property contingency in your contract, ask the buyer to give you time to find a new home before closing the sale. The contract will specify the time you have to find a new home, typically 30 to 60 days, after signing a contract to sell.
You’ll be actively searching for a new home and negotiating with sellers during this time. If you cannot find a suitable replacement property within the designated timeframe or things fall through for whatever reason, you can withdraw from selling your current home without penalty.
How it Works for Buyers:
Suppose you’re a buyer and come across a listing with a replacement property contingency. In that case, the sale is contingent upon the seller finding a suitable replacement property within a specified timeframe. If the seller cannot find a new home within the designated timeframe, the contract will be terminated, and you will no longer purchase the property. As a buyer you’ll often still proceed through the contract terms such as deposits and inspections with the expectation that everything is moving forward until you hear otherwise. The potential problem could be that you waste time/money being locked into a contract only to get kicked out if the seller doesn’t find another home.
Why this has become so popular:
The market over the past 3 years has experienced very low inventory conditions. This means as a buyer, whether you have to sell or not, it’s difficult to find your next home. This contingency protects a seller who’s worried about finding another home and still gives a buyer an opportunity to buy. This type of contingency isn’t’ something we see in markets with higher inventory or a larger selection of homes on the market.
As a result, the replacement property contingency has become more popular to provide buyers and sellers with more flexibility in these uncertain times. By including this contingency in a contract, sellers can feel more confident about moving forward with a sale, knowing they have a safety net if they can’t find a new home.
The replacement property contingency is helpful for buyers and sellers in today’s real estate market. Providing more flexibility and peace of mind can help make the buying and selling process less stressful and more successful. If you’re planning to buy or sell a property, discuss the option of a replacement property contingency with your real estate agent.