Understanding what contingent means in real estate and how it works is crucial in real estate transactions, as it significantly impacts both buyers and sellers. I’ll explore what it means when a house is contingent, the common contingencies that arise in the real estate process, the different types of contingent statutes, and the various pros and cons associated with contingencies in real estate deals.
What Does Contingent Mean in Real Estate?
When a house is listed as contingent in real estate, an offer has been accepted, but certain conditions must be met before the deal is finalized. For example, if you agree to buy a house at a specific price but only if the home inspection doesn’t reveal any problems, you have a contingent real estate contract.
This means the sale depends on the inspection, which will proceed provided that no issues specified in the contract are found. Another example is if the buyer may need to borrow money to fund the purchase. They cannot complete the deal if they fail to secure approval for the financing they need.
How Does a Contingent Offer Work?
When you make a contingent offer, you state that a specific condition must be met before the sale can go through. If the condition is not met, the contract becomes invalid (or open to further negotiation), and the seller can consider other offers. Contingencies are often used to protect the buyer from issues with the home or unexpected problems in the real estate transaction.
Example of a sale pending sign
Making a contingent offer on a property is easier if you have already found a lender you want to work with. This can ease the seller’s concerns about the sale falling through due to a lack of financing or the buyer not qualifying for a mortgage. Start the approval process when you are ready to buy a home. This will increase your chances of the seller accepting your offer, including contingencies.
Pro tip: Knowing how to negotiate is crucial in real estate deals. Our guide, How to Counter Offers as a Real Estate Agent, offers essential tips on negotiating as a real estate agent. Mastering these techniques and learning from real-life examples can help agents ensure buyers and sellers reach mutually beneficial agreements.
Common Contingencies in Real Estate
As a real estate agent, it’s important to know what contingent means in real estate and the common contingencies in real estate transactions. This helps you assist your clients in making good choices and ensuring everything goes smoothly through the buying or selling process. Here are some common real estate contingencies that are regularly included in purchase and sale agreements:
House Inspection Contingency
The home inspection contingency allows a home inspector to check the home’s condition, looking at all the parts that may not be easy to see or that the current buyer might not have considered, like roof condition or plumbing issues. Depending on what the contract says, the buyer might be able to cancel the purchase if there’s a problem with the home’s condition, or the buyer and seller might talk about who will pay for repairs.
Example image of a home inspection
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Appraisal Contingency
Appraisal contingency is commonly used when getting a mortgage. The buyer or lender can hire a licensed home appraiser to determine the property’s fair market value. If the appraiser finds the property worth less than the agreed-upon price and can’t make up the difference, the buyer can cancel the acquisition. Alternatively, they can renegotiate a new price or choose to go ahead with the purchase, knowing they might be overpaying.
What factors to consider in real estate appraisal
If the buyer still wants to proceed despite the low appraisal, they may need to work with the lender to cover the difference. This ensures that the lender is not taking on extra risk by lending for a potentially overpriced property.
Financing or Mortgage Contingency
When assisting clients with purchasing a property, it’s important to explain the significance of the financing contingency as it will allow buyers to secure funding for the deal, offering protection when they can’t obtain a loan. It also provides an option to withdraw from the agreement. Additionally, advise clients to begin by securing preapproval rather than just getting prequalified, as it gives a more accurate estimate of the loan amount they can expect and reduces the risk of a deal on a home falling through due to financing issues.
Real estate mortgage or financing process
Understanding preapproval in the mortgage process is crucial for your clients. It signifies progress towards securing a mortgage by conducting a comprehensive review of their finances. It’s vital to note that preapproval doesn’t ensure mortgage qualification. When clients make an offer, they should consult their lender to confirm their eligibility.
Title Contingency
Real estate agents should be aware of the importance of the title contingency, which ensures that the property title is clear and free of any liens or other encumbrances that could affect the transfer of ownership. Problems such as property easement problems or existing mortgage liens can impact the property’s title.
Example of a deed of sale and title
This contingency also allows the buyer to withdraw from the agreement if there are concerns about the property’s ownership. Conducting a thorough title search before closing the deal is crucial to mitigate these risks. Even if you can resolve any title issues, obtaining title insurance is advisable, as it provides coverage for future claims.
Home Sale Contingency
When working with buyers who need to sell their current home before making a purchase, consider including a home sale contingency in the purchase contract. This contingency gives buyers the option to delay or back out of the deal if they are unable to find a buyer for their current property. However, in a seller’s market, it’s common for sellers to be hesitant about accepting this contingency, as they may prefer to work with a buyer who doesn’t have this limitation.
Home sale contingency memo sign
Types of Contingent Statutes in Real Estate
Contingent properties may possess various statuses that meet the contingent criteria. The Multiple Listing Service (MLS) may employ different terminology to describe contingent statuses, so we will clarify these terms for you below:
Pros & Cons of Contingencies in Real Estate
When it comes to contingent real estate transactions, there are various pros and cons to consider. Check out the table below to find out the advantages and disadvantages of real estate contingencies:
How Often Do Contingent Real Estate Offers Fall Through?
After understanding what does contingent mean in real estate, it’s time to know how often contingent offers fall through. If you’re a real estate agent working with clients who are buying or selling a home, you might be interested in understanding the potential risks associated with making a contingent offer. According to a survey by the National Association of Realtors (NAR), only 5% of all offers resulted in a failed deal.
May 2023 NAR confidence index survey (Source: NAR)
As a real estate agent, remember that the likelihood of an offer falling through after initial acceptance is relatively low, whether contingent or not. In 2023, buyer job losses and issues uncovered during home inspections were the most common reasons for offers falling through.
Frequently Asked Questions (FAQs)
Buyers include a contingency home sale clause when making an offer on a home, which allows them to back out of buying the house if the clause’s terms aren’t met. Buyers risk forfeiting their earnest money deposit if they choose not to proceed with the home purchase without a contingency in place.
In a seller’s market with more buyers than available homes, waiving contingencies can be a smart move. Your offer will stand out from others the seller receives, potentially increasing the chance of them accepting it.
If a seller cannot fulfill the contingencies of your offer, the sale will not proceed. In this case, your earnest money deposit will be refunded, and you will need to either continue your home search or renegotiate with the seller to reach a new agreement.
Bottom Line
It’s important to understand the concept of contingencies in real estate and how they function to navigate real estate deals successfully. By being knowledgeable about common contingencies, various types of contingency clauses, and their respective advantages and disadvantages, individuals involved in real estate transactions can make well-informed decisions and navigate the process more effectively.
