How to Upgrade with a Contingent Offer



If you currently own a home and are thinking about upgrading, your greatest advantage is being able to leverage the equity you've built up. This allows you to make a bigger down payment, avoid private mortgage insurance, and even fund improvements on the new property.

A common way to achieve this is through a contingent offer. You secure a contract on the new house first, list your current property, and then schedule both closings back to back.

Let's walk through the mechanics in a little more detail.

When you find the right house, your offer will include a clause making the purchase contingent on selling your current home, typically within 30-60 days. It can be more or less time depending on how competitive you want your offer to be. If they accept, we'll want to get your house listed right away.

When considering how to price your home with this strategy, keep in mind that you don't have months to test a high price. We'll look at comparable home sales and decide on a price that is realistic and will invite a lot of interest.

Once you've accepted an offer from a buyer, we'll start moving toward the closing date. Included in the negotiations will be timelines for occupancy that work for everyone. We'll make sure you have enough time with occupancy of both homes to move all of your belongings. This means that you aren't handing over the keys to your buyer for a couple of weeks after the closing date. Your buyer may want some compensation for this time because they’ll be the ones paying the mortgage at this point. That's not always the case, but it's a customary process we'll make sure to put in writing.

So that's a basic overview assuming everything goes according to plan. Tying two transactions together introduces a lot of moving parts, and it's a standard path to upgrading your housing. But it's also important to be aware of the risks.

First, there's the obvious risk that you can't find a buyer in time. If your window to sell runs out and your house is still sitting on the market, your contingent contract on the new house terminates. You can ask the seller for an extension, but they may want to renegotiate.

And even if you find a buyer, there's the risk of that buyer backing out before closing. Their loan could get denied for a variety of reasons or they may find an inspection issue that's a dealbreaker.

You also have to look at it from the seller's perspective. A seller might accept another non-contingent offer from someone else, even if it's for less money. They may need to move quickly and don't want to take on the risk of your home not selling in time.

Now, with all of that considered, people do this successfully all the time. These are just things to be aware of.

So let's run a hypothetical scenario to make this a little more tangible.

Imagine Jack and Diane bought a house in town for $125,000 in 2010 with an interest rate of 5%. With taxes and insurance estimated at $225, their monthly payment would've been $896 and they've now paid their mortgage down to $80,547.

They've also made a lot of improvements to their house and it has great curb appeal, but they're looking for something with land and are able to take on a larger payment.

After looking at comparable recent sales with their agent, Jack and Diane think they could sell their home quickly for $260,000.

Subtract a hypothetical 6% in selling fees, and they estimate having about $163,853 in equity to put toward their next home.

They have their sights set on a really nice home with a workshop on 5 acres going for $330,000. By applying their $163,853 in equity as a down payment, they'll end up needing to finance $166,147. At a 6.5% interest rate, their new principal and interest payment comes to $1,050 per month. Adding an estimated $250 for taxes and insurance brings their total new monthly payment to $1,300.

If they'd tried to buy the same home with zero down, their monthly payment would be $2,336. This would not be a manageable payment for them. So by leveraging the equity in their current home, they've saved $1,036 per month compared to starting from scratch.

Let's look at it from another angle. Imagine they want to keep back $25,000 of their sale price to pay for some renovations or to dig a pond with a dock. This means they'd be putting $138,853 toward the down payment and financing $191,147. Now their monthly payment increases to $1,458, but allows them to make the property much more enjoyable for years to come.

While this scenario is clean and simplified to illustrate the financial mechanics, it shows how equity gives you more buying power in the real world. When you’re ready to take that next step, we can run the actual math on your current home value and figure out a realistic budget for your next property.

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