Many buyers have to sell their current house before they purchase a new one. If you find a house you love before you sell your current one, what do you do?

A contingency is a provision in a real estate contract which states that if something doesn't happen, such as selling your own house or obtaining financing, the contract becomes null and void. The standard contingency for selling your own house would state:

This contract is contingent until 9 p.m. on the ___ day after the Date of Ratification (Deadline upont the sale of the Purchaser's property located at __________). If the Purchaser does not satisfy or remove this contingency by the Deadline, then at any time after the Deadline, but prior to the Purchaser satisfying or removing this contingency, either the Seller or the Purchaser may declare this Contract void by providing notice to the other party.

This language clearly protects the Purchaser. If you aren't able to sell your own home by the deadline, you don't have to buy the new one.

As you can probably imagine, many sellers do not want to deal with the uncertainty of such a transaction. A seller wants to know that they have a deal or not -- when will the house be sold?

To balance this out, there is a compromise position which is acceptable to many sellers: a kick-out clause. With this, the seller accept the buyer's contract which contains a contingency for the sale of the buyer's house, but adds language to the affect that if another offer is received, the first buyer will have X numbers of days to decide whether to "buy or walk".

This is how it is usually stated:

The Seller may continue to offer the Property for sale and accept bona fide back-up offers to this Contract. If during the term of this contingency (the sale of Purchaser's present property), a back-up offer is accepted, the Seller will Deliver notice to the Purchaser requiring that the contingency be satisfied or removed not later than 9 p.m. on the ____ day after delivry of the notice, or this Contract will be null and void.

How do Purchasers remove the contingency for the sale of their current home?

There are several ways, including:

if the Purchasers have been successful and obtained a sales contract on their home, they give a copy of that contract to the Seller, with a letter removing the contingency;

if the home hasn't been sold yet, but the Purchasers are willing to take a chance that it will sell, they simply present a letter to the seller removing the contingency. However, this time the Purchasers will need to present proof that they can afford to purchase the home. This can be in the form of a letter from the lender stating that financing of the new home is not contingent on the sale of the current home, or the Purchasers can present evidence that they have sufficient funds in order to close on the new home.

No matter how much they want the home, purchasers would be foolish to remove the contingency when they cannot meet either of these two requirements. Otherwise, they are left legally required to purchase the new home without having sold their home, or they would be in breach of contract. Neither situation is a good one.

This is a dilemma for most homeowners. You want to step into a bigger house or move to a different neighborhood, but can't afford two houses at once. I don't recommend that anyone who absolutely must sell his current home before buy a new one make an offer on a new property.

If you aren't sure of your financial situation, go ahead and talk to a mortgage lender before you sign a contract. Because sellers are reluctant to accept any contingencies, especially those for the sale of the purchaser's current home, it is strongly recommended that you put your house on the market and test the waters.

You never know, your house could be hot, and you will quickly sell it. Armed with that contract, you won't have any problem in buying your new home. But you should still protect yourself.

While a real estate sales contract is legally binding, it is not the same as cash in the bank. Buyers do walk away from contracts, with and without justification. If this should happen to you, you can get a money judgment against your contract purchaser, but it does nothing to solve the problem of your contract with a seller. They may consider you in breach if you aren't able to comply with the terms of the contract you signed, leaving you open for a lawsuit.

So, if you are able too, sell your house. Then buy.