If you’re in the real estate space, you’ve likely come across the term contingency. While many realtors advise a cautious and deliberate approach, leveraging contingencies can actually be a savvy strategy to secure a favorable deal in today’s competitive market.
According to the Zillow Group Consumer Housing Trends Report 2022, a significant percentage of buyers have incorporated a contingency in at least one of their offers.
Although a contingency operates under different regulations compared to a standard purchase agreement, it empowers both the seller and buyer to void the contract if specific conditions are not met. It can take various forms based on the preferences of the parties involved, providing them with a reassuring sense of control.
Notably, understanding “contingent” meaning in real estate is crucial. If you’re still deliberating whether a contingency is a deal maker or breaker, this article will help you understand contingent meaning in real estate.
Also, learn the common types of contingencies in real estate, the risks involved, and how to mitigate them as a buyer or a seller.
What Is Contingent in Real Estate?
When a real estate listing indicates a property as contingent, it signifies that a homeowner has entered into an agreement with a buyer for the property’s sale. However, the completion of the sale hinges on one or more conditions that must be met before finalization.
A homebuyer might present a contingent offer if they are awaiting a home inspection or appraisal for the new property, confirmation of financing, or the completion of the sale of their existing home.
Contingencies give the homebuyer the ability to withdraw their offer under mutually agreed-upon conditions, avoiding financial repercussions like forfeiting an earnest money deposit.
You can still make an offer on a contingent home, known as a backup offer. In this scenario, the buyer and their agent may consider your offer if the original buyer’s contingencies are not satisfied.
Common Contingencies in Real Estate
Homebuyers may choose to make a contingent offer on a property for various reasons. Let’s explore the most prevalent types of contingencies for a better understanding.
- Financing Contingency
A financing contingency, also referred to as a mortgage contingency, occurs when a homebuyer awaits approval from a mortgage lender for a home loan. Typically, this contingency grants the buyer a 30 to 60-day period to secure financing.
If genuine efforts to obtain mortgage approval fail within that time frame, buyers have the option to withdraw from the deal without incurring penalties. In essence, a mortgage contingency enables buyers to back out of a sale if financing cannot be secured, with the return of their earnest money deposit.
- Home Appraisal Contingency
A home appraisal contingency is contingent on a home appraisal confirming that the home’s listing price aligns with its appraised value. Mortgage lenders often require a home appraisal before approving financing.
This contingency ensures that the property’s value aligns with the listed price, providing crucial reassurance for both the buyer and the lender.
- Home Inspection Contingency
A home inspection contingency hinges on the condition of the home, and the sale is contingent on an inspection revealing no major problems.
If the inspection report highlights significant issues, the buyer has the option to withdraw without legal implications.
This contingency allows for renegotiation of the sales price if substantial problems are identified during the inspection.
- Title Contingency
A title contingency allows the buyer to withdraw their offer if it’s discovered that the property does not have a clear title. This implies the presence of third-party claims to the house, such as liens or unpaid debts from the previous owner.
Buyers typically conduct a title search or check to satisfy this contingency. It’s crucial to ensure the seller has the rightful authority to sell the property, preventing ownership disputes in the future.
Moreover, lenders often require a title contingency, and even cash buyers can include this clause in their contract to mitigate potential risks.
Understanding the Implications of Contingencies for Home Buyers
Contingencies play a crucial role in safeguarding the interests of buyers throughout the contingency home sale process. These contractual clauses establish that specific conditions must be fulfilled before the deal is finalized, providing buyers with the flexibility to step back if their expectations are not met.
For example, a financing contingency ensures that the buyer’s financial situation is secure enough to facilitate the purchase. Similarly, a settlement contingency imposes specific requirements on sellers, such as making necessary repairs or updates before the closing.
Furthermore, the home inspection contingency acts as a protective measure for buyers. It empowers them to renegotiate terms or withdraw from the transaction if significant issues emerge during the inspection process, ensuring a fair and informed decision-making process.
Other benefits include:
- Protection for buyers’ earnest money deposit: Contingencies provide a safety net for buyers, allowing them to exit the contract without forfeiting their earnest money deposit.
- Extended time for important steps: Buyers gain valuable time to secure financing, thoroughly inspect the property, or complete the sale of their current residence, ensuring a more comprehensive decision-making process.
- Negotiation leverage for repairs and price adjustments: Contingencies grant buyers the ability to negotiate terms, whether it’s requesting repairs or seeking price reductions based on the findings of property inspections.
- Prevention of uninformed purchases: By allowing buyers to uncover defects or issues during the due diligence period, contingencies prevent them from inadvertently purchasing a property with undisclosed problems, contributing to a more informed and secure investment.
Potential Risks Associated With Contingencies
Navigating a contingent real estate transaction involves considering various factors, and one critical aspect that warrants careful attention is understanding the potential risks associated with contingencies.
Let’s explore some of these buyers’ risks below:
- Competitive Disadvantage in Hot Markets
In a bustling real estate market with high buyer activity, adding contingencies can pose a risk. Offers without contingencies may appear more attractive to sellers, potentially leading them to favor those offers over yours.
For instance, if your contingent offer includes a contingency that requires the sale of your current house before completing the new purchase, but another buyer’s offer doesn’t have such a condition, the seller might opt for the quicker and more straightforward option.
- Seller’s Impatience
Contingencies, especially those involving the sale of a buyer’s current property, might test the seller’s patience, especially in a competitive market. Sellers may prefer offers without such contingencies to avoid waiting for the resolution of additional events.
- Costs Despite Contingency
While a home sale contingency can offer peace of mind to the buyer, it doesn’t exempt them from other costs associated with home buying. Expenses like home inspections, bank fees, and appraisal fees are incurred regardless of the contingency.
If the deal falls through due to the property not selling on time, these costs are not refunded, leading to financial implications for the buyer.
How Can You Manage Contingencies Effectively As a Buyer?
Here are handy tips to help you manage contingencies effectively when buying a property:
- Initiate Early Mortgage Preapproval
Kick off the mortgage approval process well in advance, ideally before actively searching for a home. This signals to sellers that you’ve taken proactive steps to secure financing, easing concerns about potential setbacks related to financial issues or mortgage qualification problems.
- Collaborate With a Credible Lender
Identify and establish a relationship with a reputable lender before presenting an offer. Sellers are likely to view your contingent offer meaning more favorably when they know you’re collaborating with a reliable financial institution, instilling confidence in the transaction.
- Ensure Clear and Open Communication
Articulate your intentions and the rationale behind any contingencies transparently to the seller. Open and honest communication builds trust and understanding, making sellers more comfortable with accepting an offer that includes contingencies.
- Present Compelling Offer Terms
Despite contingencies, enhance the competitiveness of your offer by presenting attractive terms. This includes a fair sale price, a reasonable earnest money deposit, and a realistic closing timeline.
These elements help counterbalance any concerns the seller may have regarding potential delays or uncertainties associated with contingencies.
- Swift Contingency Resolution
Act promptly to address and resolve contingencies once your offer is accepted. Efficiently handling inspection concerns, securing financing, or completing necessary tasks minimizes the impact of contingencies on the overall timeline, enhancing the appeal of your offer to the seller.
- Highlight Financial Stability
Provide tangible evidence of your financial stability to the seller. This may involve showcasing a robust credit score, a consistent employment history, and a substantial earnest money deposit.
These factors instill confidence in the seller regarding your capacity to navigate the home-buying process successfully.
Manage Contingencies Effectively As a Seller
A home sale contingency poses risks for sellers as there’s no guarantee that the home will sell. Even if the contract allows the seller to actively market the property and entertain offers, listing the house as under contract may deter other potential buyers.
Prospective home seekers often avoid properties under contract to prevent investing time and emotions in a property they might not have the opportunity to purchase.
Before agreeing to a home sale contingency, sellers or their real estate agents should investigate the potential buyer’s current home situation by determining:
- Market presence: Check if the potential buyer’s home is already on the market. The absence of a listing is often a red flag, indicating the buyer might still be in the contemplation stage of buying and selling.
- Pricing accuracy: Assess whether the home is listed at the correct price. Real estate agents can prepare comparables to ensure the house is competitively priced for a successful sale.
- Listing duration: Examine how long the potential buyer’s home has been on the market. An extended listing period could signal overpricing, challenging showing procedures, or a slow market.
- Neighborhood averages: Evaluate the average time homes stay on the market in the neighborhood. If the average is short, there’s a higher likelihood of a successful sale. However, if it’s prolonged, the seller may face extended waiting with uncertain prospects for the buyer’s home to sell.
While a home sale contingency may be beneficial for sellers with properties struggling to find buyers, it’s crucial to impose a time limit for the buyer to sell their home, typically one to four weeks.
This places pressure on the buyer to adjust the asking price and secure a sale while also preventing the seller from losing excessive time if the transaction fails to close.
To mitigate risks associated with a home sale contingency, sellers can include a kick-out clause. This clause allows the seller to continue marketing the property and accept offers from other buyers.
The current buyer is given a specific timeframe, such as 72 hours, to remove the home sale contingency and proceed with the contract. If the buyer fails to remove the contingency, the seller retains the option to exit the contract and proceed with a new buyer.
Contingent vs. Pending Status
At times, a real estate agent may alter the listing status to pending in the multiple listing service, accompanied by open subject-to clauses that need fulfillment.
For instance, if the real estate contract includes a financing contingency requiring the buyer to secure a loan, the listing agent might be confident that the buyers can easily meet this condition.
In such cases, rather than marking it as “conditional,” they opt for the “pending” status in the MLS.
In certain real estate markets, a property with contingent status might continue to accumulate days on the market as if it were still actively for sale.
To address this, a seller’s agent could decide that changing the status to “pending” better serves the interests of their client rather than letting the market time continue to rise.
Numerous factors can hinder the closing process for contingent homes. Some contingencies may necessitate the buyer to sell their current home, while others provide a period for the buyer to conduct thorough real estate due diligence.
It’s quite common for homebuyers to engage in extensive research on a property’s history before committing to the final paperwork. Conducting such research is an integral part of the home-buying process.
Regardless of the specific contingencies involved, all of them have the potential to lead to a failed sale. While surprises are unwelcome, they are an inherent reality in real estate transactions.
Quantifying the number of contingent and pending offers that fall through each year is challenging. However, data from the National Association of Realtors in February 2023 revealed that 6% of purchase agreements were terminated before closing, and 12% of sales faced delays.
Navigating Contingencies Successfully
If you’re considering making an offer on a contingent house, follow these strategies to enhance your chances of securing acceptance:
- Engage a Professional Real Estate Agent
Collaborate with an experienced buyer’s agent who can extract vital information about the property’s contingent terms. They will communicate directly with the listing agent, uncovering details about existing contingencies and offering insights to help structure a more compelling offer.
- Understand Existing Contingencies
Acquire comprehensive details about the current contingencies in play. This knowledge allows you to minimize your own contingencies, making your offer more attractive. For instance, if the existing offer includes a financing contingency, secure your financing beforehand to present an offer without that specific contingency.
- Establish a Personal Connection With the Seller
When deciding to make an offer, especially on a kick-out contingent property, personally reach out to the home seller. Craft an email or letter expressing your genuine interest and portraying the property as your dream home.
This personal touch can significantly influence the seller’s perception, increasing the likelihood of your offer being considered over the existing contingent one.
- Be Patient
Practice patience while awaiting the outcome of the current offer. Refrain from incessantly checking in with the listing agent or home seller about the contingent offer’s status. Excessive communication may deter them and jeopardize the chances of your offer being well-received.
Strategies for Sellers to Evaluate Contingent Offers and Make Informed Decisions
Improve your sales approach by using these persuasive and successful methods to evaluate contingent offers and reach well-informed decisions:
Proactive Problem-Solving: Navigating Obstacles With Foresight
Take the initiative to preemptively address potential issues that could arise during the real estate transaction. By proactively identifying and resolving concerns, you not only pave the way for a smoother closing process but also demonstrate a commitment to ensuring a hassle-free experience for all parties involved.
Maintain a proactive mindset throughout the transaction, anticipating obstacles and strategizing effective solutions in advance.
- Strategic Concessions: Balancing Goals Through Compromise
Recognize the art of compromise and identify areas where concessions can be made without compromising your overarching goals.
A thoughtful approach to negotiation involves finding common ground that benefits both parties, fostering goodwill, and paving the way for a mutually beneficial agreement.
Knowing when and where to make concessions is a key element in building collaborative and successful real estate transactions.
- Adaptability Is Essential: Navigating the Negotiation Landscape
Embrace adaptability as a cornerstone of effective negotiation. Remaining open-minded and flexible during bargaining processes, whether concerning repairs, pricing adjustments, or closing dates, is crucial.
Being prepared to make concessions can create a positive atmosphere, facilitating a win-win arrangement that satisfies both parties involved. Recognizing opportune moments to make concessions ensures a dynamic and fruitful negotiation process.
- Expert Guidance: Tapping Into Professional Wisdom
Harness the wealth of knowledge offered by attorneys, real estate agents, and industry experts. Collaborating with seasoned professionals provides invaluable insights that contribute to sound decision-making throughout the real estate transaction.
Their expertise is instrumental in navigating complexities, offering strategic advice, and ultimately maximizing the positive outcome of the deal. Gain a competitive edge by leveraging the proficiency of professionals in the field.
Importance of Clear Communication Throughout the Contingent Period
Underscoring the importance of clear communication and collaboration in real estate transactions during the contingent period is essential. First, efficient contingency removal and improved deal-closing efficiency hinge on effective communication.
When communication is executed properly, it expedites contingency removal, resulting in an overall enhancement of the efficiency in closing deals.
On the other hand, engaging in an open dialogue between buyers and sellers allows for the proactive addressing of concerns, finding compromises, and ultimately achieving successful outcomes.
The interplay of negotiation and clear communication not only leads to successful results but also cultivates trust and a collaborative atmosphere throughout the entire process.
Moreover, effective communication is paramount when negotiating deadline extensions. Anticipating delays and promptly informing the other party or their representatives is deemed essential.
Clearly justify the reasons behind the extension request and provide supporting documentation to foster trust and significantly increase the likelihood of reaching a mutually beneficial agreement.
Frequently Asked Questions
Here are commonly asked questions about contingencies:
- How long does a contingent offer usually last?
Contingent offers typically last for about 30 to 60 days, although you can negotiate for specific timeframes and specify them in the purchase agreement.
- Can the seller keep showing the property with a contingent offer on it?
Yes, sellers can continue showcasing a property under a contingent offer. However, they must transparently disclose the contingent status to potential buyers, ensuring informed decision-making.
- What should I do if I want to withdraw from a contingent offer?
If you’re considering backing out of a contingent offer, carefully review the terms outlined in the purchase agreement. Contingencies, such as inspection outcomes or financing challenges, can serve as valid reasons. Seek guidance from your real estate agent to navigate the process effectively.
- What options do sellers have instead of accepting a contingent offer?
Sellers have alternatives to accepting contingent offers, such as
- Negotiating for a shorter contingency period
- Exploring a kick-out clause allowing consideration of other offers while honoring the contingent offer
- Evaluating non-contingent offers to streamline the selling process
Get a Grip of Contingencies in Real Estate
Whether you’re buying a home or getting ready to sell, it’s crucial to grasp the different stages a home sale can undergo before reaching closure. While price remains a top priority for both buyers and sellers, contingencies emerge as a close second.
While a contingent offer introduces a level of risk for the buyer, it also offers a valuable time cushion for tasks such as selling their current home and securing financing.
It is always prudent to seek advice from your real estate agent before making an offer on a home, particularly when contingencies are involved. Their expertise can provide invaluable insights, ensuring informed decisions and a smoother home- buying or selling process.
