7% of home sales in the US fall through due to contingency. This indicates that a significant portion of home sales doesn’t make it to closing, and contingencies is one of the reasons.
Contingent home transactions can protect your interests as a buyer. They are dependent on the fulfillment of certain conditions. You can back out if the transaction does not proceed as planned.
What Does Contingent Mean in Real Estate?
Real estate contingent refers to the home’s sale status. In this, either party makes an offer and it is accepted but certain conditions must be met before. There are two possible scenarios.
- The buyer makes an offer and the seller accepts it. However, the seller chooses to keep the listing active on housing websites till all the conditions of the sale are met.
- In another case, the buyer accepts the price listed by the seller. But they keep a condition that the home inspection report should be clean. Only then the deal will take place.
Both these scenarios are examples of contingent offers. They depend on certain conditions to be fulfilled. Contingencies protect the interests of both parties but they are mainly for home buyers’ benefit.
How Do Contingencies in Real Estate Work?
If you have shortlisted a house and want to make an offer, adding some contingencies can ensure a good deal. Here’s how you can proceed:
- Select Contingencies: There are different contingencies related to appraisal, inspection, title, etc. Select wisely because adding too many contingencies can put off the seller. Consult an agent before making a contingent offer.
- Make an Offer: The next step is to make an offer to the seller directly or through an agent. Make sure you specify your conditions to the seller. Also, explain how you plan to finance your purchase and whether you have a property to sell first.
- Draw Up a Contract: If the seller accepts your offer, you can draw up an agreement. The listing status will change to active contingent. The conditions have to be met within the time specified in the real estate contingency contract.
- Fulfill of Contingencies: As per the contingencies mentioned in the agreement, the property appraisal and inspection would take place. You need to verify whether the disclosures and valuation given by the seller are accurate.
- Close the Deal: After the conditions are satisfied, you can go ahead with the closing process and make the payment as decided. The title transfer takes place and you become the property owner on the date mentioned in the contract.
This is how contingency on a house works for home purchases. The seller can also place contingencies in the contract related to new housing and mortgage approval. If either party is unable to meet these contingencies, the contract may fall through.
Types Of Contingencies In Real Estate
As a home buyer, you have several contingencies at your disposal to include in the purchase agreement. Some of the common ones are listed below:
1. Home Sale Contingency
This contingency states that the deal will only happen if you can sell your current home first. It gives you time to be financially ready to purchase a new property.
However, you can buy a house without this contingency if you have access to alternative financing options. Be aware that in a seller’s market, the seller may reject your offer for a non-contingent one.
2. Home Appraisal Contingency
To ensure that the seller’s property valuation is as per the market conditions, you can place a home appraisal contingency. This is necessary when you are taking out a mortgage.
The lender will give you a loan as per the actual worth of the property. You can negotiate if the seller asks for a price greater than the appraised value or back out if they do not agree.
3. Home Inspection Contingency
This real estate contingency allows you to assess all the aspects of a property before purchase. You can verify the disclosures made by the seller.
If the home inspection report reveals some major issues with the property, you can negotiate with the seller regarding repairs. However, if there is a lack of transparency, you can back out of the deal.
4. Mortgage Contingency
You need to secure home finance before purchasing a property. A mortgage contingency can buy you time for that. The deal will only take place if you can finance it with a mortgage.
To make sure you fulfill this contingency, take some time to complete the mortgage pre-approval paperwork. This can bring you closer to mortgage approval. Also, take care of your credit score and avoid financial issues.
5. Title Contingency
This is a very important contingency that you should always include in your purchase agreement. The title deed of the home specifies the actual owner of the property.
If there are title disputes like mortgage lien and easement issues related to the home you want to buy, you can face legal issues. To get protection from future claims, use a title contingency.
6. New Housing Contingency
The seller can put in this contingency to back out in case they are unable to secure a new home before the specified date. The seller can accept your offer even before they find their next home. However, this contingency makes the deal uncertain.
Contingency Status
A contingent listing status can mean several things. As a home buyer, when you search for ‘real estate for sale near me‘, you will come across some listings with ‘status contingent’.
You should check the subcategory of the contingency status before making an offer.
1. Contingent Continue To Show (CCS)
This status means that the seller has accepted an offer but kept the listing active to show the property to more buyers. This generally happens when there are multiple contingencies and the contract is likely to fall through.
2. Contingent: No-Show
When an offer has few contingencies and the seller is confident of closure, they select this status. It means that they have accepted an offer and are not willing to show the house any further.
3. Contingent: With Kick-Out
The seller sets a deadline in the contingent real estate contract for the buyer to meet certain conditions. In the meantime, they continue to show the house to other buyers. They can kick out the first buyer if they receive a good no contingency offer.
4. Contingent: Without Kick-Out
When the seller opts for this listing status, it means that there is no deadline for the buyer to meet contingencies. Even if the seller receives a better offer, they can’t kick out the buyer.
5. Short Sale Contingent
The seller and their mortgage lender may accept an amount lower than the listing price to recover the remaining mortgage amount. The listing status becomes short sale contingent. The house is no longer on sale and the seller has accepted an offer.
6. Contingent Probate
This status is commonly used for properties that are sold after the death of the owner. It means that the lawyer will receive a portion of the sale value for completing the process on behalf of the owner.
Pros and Cons of Contingencies in Real Estate
Here are some pros and cons if you enter into a contingent offer during your home-buying process.
Pros
- Exit Strategy: Contingencies provide a safety net, allowing buyers to terminate the contract and recover their earnest money deposit if unforeseen circumstances arise.
- Due Diligence: Contingencies grant additional time for crucial steps like securing financing, conducting a thorough property inspection, or selling an existing residence before finalizing the purchase.
- Negotiation Leverage: Findings from the inspection contingency can empower buyers to negotiate for repairs or price reductions, ensuring they get a fair deal.
- Quality Assurance: Contingencies act as a safeguard against hidden problems. If major defects or issues are discovered during the inspection, buyers can walk away without financial burden.
Cons
- Reduced Competitiveness: Contingencies can make your offer less appealing to sellers, particularly in a competitive market where streamlined transactions are preferred.
- Offer Rejection Risk: Multiple offers with fewer contingencies might be chosen over yours, decreasing your chances of securing the property.
- Potential Financial Loss: If the deal falls through due to a contingency, you may lose non-refundable fees associated with inspections and appraisals.
- Closing Delays: Contingencies can introduce delays while conditions are met, potentially pushing back the closing date and causing logistical challenges.
How Can a Contingency Protect Buyers?
Contingencies in the purchase agreement can protect buyers from potential financial or legal risks before the sale closes. Buyers get a way out of a problematic sale.
For example, a mortgage contingency allows you to back out of a sale if you are unable to secure financing. They get back their earnest money deposit.
A home inspection contingency allows a buyer to back out without legal implications if the inspection report shows significant issues.
Can You Make an Offer on a Contingent House?
You can make an offer on a contingent house for sale. The contingent status means that the listing is still active. Unless the status changes to pending or closed, you still have a shot at securing the deal.
It may so happen that the seller and the buyer who has made an offer do not agree on certain terms or are unable to fulfill contingencies. The contract may be terminated and your offer may stand a chance.
Even under contract, a seller may like your offer more than the first buyer’s. They can ask the first buyer for contingency removal and closing within 24-48 hours or back out. You can proceed with the deal if the first buyer backs out.
Bottom Line
Understanding contingencies is crucial when buying a home. Contingencies can protect you and ensure a good deal. However, they can delay the closing process and lower the chance of securing a property in a competitive market.
It’s vital to carefully weigh the pros and cons of contingencies and work with a knowledgeable real estate agent. This can increase the chances of a successful and stress-free home-buying experience.
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Frequently Asked Questions
1. What does active contingent mean in real estate?
The active contingent status means that a property is under contract but it is available for showing to other buyers. Unless the contingencies are met, the deal will not happen and the listing will remain active.
2. What happens if my contingent offer falls through?
If the seller is unable to meet the contingencies, you can back out of the agreement and get back the earnest deposit. In case you are unable to fulfill the contingencies set by the seller, you will lose the deal.
3. Is it better to be contingent or pending?
For a buyer, the contingent status allows them to back out and get the earnest deposit if the conditions are not met. However, for the seller, the pending house status is preferable because it means the deal will get closed soon.
