What does “Contingent” in Real Estate Really Mean

Contingency Defined

A contingent home sale simply means that a potential buyer makes an offer to buy a house, but this will be done with some contingencies or conditions that must be met before the sales closes.

Most of the time or in most cases, these conditions involve certain milestones that must be passed for the deal to close or be completed.

Knowing What Contingencies Are:  Contingencies are contractual provisions that protect the interests of both buyers and sellers during the home buying process.

They enable some conditions to be met so that the sale goes through without any hiccups.

Contingencies are put in place to address any uncertainties or potential issues that may arise during the transaction. Some common contingencies include:

Here are some of the contingency types:

Inspection Contingency: This type of contingency permits the buyer to inspect the property thoroughly.

This enables them to identify any potential issues or faults before purchasing the property.

Appraisal Contingency: This ensures that the appraisal value of the property is sufficient to warrant buying it.

This allows protection for the buyer from overpaying and a way of termination of the deal or renegotiating on a lower price. 

Financing Contingency: This clause allows the buyer to get a mortgage loan to own the property.

If the financing falls through, they can walk out of the agreement without losing their EMD money.

Sale Contingency: The sale contingency clause will be introduced if the buyer needs to sell their home before purchasing a new one.

It allows them to bid for a new home with the requirement that a deal would only take place if the old home is sold.

This contingency allows more time for a buyer to attract a buyer or buyers to their property.

The Impact on Buyers and Sellers: For buyers, a contingent home sale provides flexibility and protection to thoroughly assess the property and the condition it is in before any commitments are fully made toward the purchase of the property.

It allows them to make inspections, secure financing, and sell their current home if needed.

With an acceptance of an contingent offer, however, sellers have fewer guarantees.

While it may mean additional uncertainties, it also allows them to continue to market their property and potentially receive a back-up offer should the primary offer fall through.

Advantages for Buyers

As is typical in these cases, a contingent home sale is common.

Their offer is dependent on the sale of their current home.

More Time to Sell Current Home: A contingent home sale allows buyers more time to sell their home.

If they can’t sell it, then they won’t have to purchase the home they have under contract with the seller.

This allows buyers plenty of time to market and sell their current property without the added stress of double mortgages.

The buyers can avoid the double mortgage strain by making use of this option.

Protection from Missing the Opportunity on a Dream Property: Buyers who submit an offer with a home sale contingency may be at a disadvantage compared to those who can offer a non-contingent deal.

A contingent offer, however, will still be attractive to sellers when there are no other offers pending, or if there has been a long duration for which the house was shown.

This keeps the purchaser interested in the home while going through the sale process of his existing home.

Purchase Price Negotiation: The buyer usually has a chance, during a contingent period, to negotiate the purchase price of the home dependent on the outcome of the sale of their home.

If the sale of their current home falls through or they receive a lower offer than expected, buyers can reevaluate their budget and potentially adjust their offer for the new home accordingly.

This flexibility can enable them to negotiate from a much stronger position and could actually end up with a better purchase price.

Buyer Risks: Perhaps the biggest risk for buyers who want a contingent home sale relates to financing.

If it is dependent on the sale of their current home; it may be tough to qualify for a mortgage, let alone meet their lender’s standards.

That in turn slows down the process can even cost them the deal.

Backup Offer Competition: It means that when a better offer comes along, the buyer with a contingent offer may be out of luck if they cannot perform on the contract.

Multiple Contingencies Possibility: Sometimes, a contingent sale of home may have multiple contingencies involved.

The buyer, for example, can add the sale of their current residence as a contingency, as well as a financing and appraisal contingency. 

Having multiple contingencies can increase the complexity and potential risks involved.

Delays in Closing: Contingent home sales can lead to delays in the closing process.

For instance, if the seller’s current home sale falls through or encounters unexpected complications, it can cause delays that affects all parties involved.

Buyers need to be prepared for possible extensions to the closing date and the potential impact it may have on their plans. 

Waiving a contingency is a risky option for buyers. 

Benefits for Sellers

Faster Sale: One of the major advantages of a contingent home sale is that it can result in faster sales.

The seller, while accepting a contingent offer, will accept an offer in which the buyer has made his offer contingent upon certain conditions being met.

All the seller has to do is perform.

Higher Sale Price: Oftentimes, contingent offers come from motivated buyers who really desire to acquire the house.

These kinds of buyers are more likely to place a higher purchase price in order to get their offer accepted.

Sellers can benefit from this situation by receiving competitive offers and potentially selling their home for a higher price than they initially thought.

Greater Flexibility: Taking a contingent offer allows sellers greater flexibility in their own timeline for purchasing a home.

The sellers are often purchasing a new home at the same time. If this is the case, accepting a contingent offer allows them to work towards coordinating the closing dates on both of these transactions.

This can eliminate a little bit of housing gap, and a much easier transition from one home to another.

Further, the sellers can negotiate a “kick-out clause” into the contract which allows them to consider other offers and potentially accept a non-contingent offer if it is more favorable.

Wider Group of Buyers: Buyers who want to purchase a home,  but have not yet sold their current home, may make an offer if they see that the seller is accepting contingent offers.

This opens up the sellers market and creates the likelihood of attracting several offers.

This competitive situation  could result in a better selling price for the seller.

Managed Risk:  Adding a “kick-out clause” in the contract enables sellers to maintain their control and still be able to market the property to interested third parties while still offering them the ability, if a non-contingent offer is made, to accept that offer and proceed .

Seller Risks

Extended Timeframe: With a home sale contingency, the closing process is likely to take longer.

The buyer will, after all, have to finalize the sale of their own home before they can finalize a deal on your property.

That leads to a potential lag time in the finalization of the sale and the potential proceeds.

Possibility of Multiple Contingencies: Sometimes, a potential buyer’s offer may contain multiple contingencies such as a financing contingency or inspection contingency. 

It only makes the deal more complex, thereby raising the possible meltdown of the transaction or even delaying it.  

The Buyer’s Sale Uncertainty: When you accept a contingent offer, you are literally banking on the sale of the buyer’s existing property.

This poses an uncertainty, since this may comprise the ability of the buyer to sell their  own property.

Their sale may fall through, or get delayed excessively.

This is capable of bringing the whole transaction into jeopardy.

Narrower Pool of Buyers: This narrows down the potential pool of buyers, as many sellers prefer non-contingent offers that are not dependent on the sale of another property.