what does contingent mean when buying a house

Have you ever come across the term “contingent” while browsing property listings and wondered what it meant? In real estate, a contingent status means that an offer on a home has been accepted, but certain conditions must be met before the sale can proceed.

This comprehensive article will help unravel this often confusing term, guiding you through its ins and outs in the housing market. Ready to decode real estate jargon and become a savvy home buyer? 

Understanding Contingencies in Real Estate

Contingencies in real estate refer to the conditions that must be met before a sale can proceed, with the buyer typically having certain protections and the ability to back out if these conditions are not met.

Definition of Contingent

In the world of real estate, a house becomes contingent after a buyer has made an offer and the seller has accepted it. However, this acceptance isn’t without conditions. The sale hangs on these specific circumstances or contingencies being met, hence the term “contingent”.

Some contingencies could be that the potential home buyer must secure financing or sell their current property before proceeding with purchase.

 So while an agreement is in place between the seller and buyer under a ‘contingent’ status, it doesn’t necessarily mean everything is set in stone — certain prerequisites must happen first to seal the deal.

Also know that if the contingencies are not met, the seller can accept another offer or renegotiate with the original buyer.

Types of Contingencies in Real Estate

When it comes to purchasing a home, there are several types of contingencies that can come into play.

These contingencies serve as protection for both the prospective buyer and the seller, ensuring that certain conditions are met before moving forward with the sale.

Understanding the different types of contingencies is essential for any home buyer or seller.

Home Inspection

A home inspection is a contingency that buyers often include in their offers when purchasing a house. During a home inspection, a professional inspector thoroughly examines the property to identify any potential issues or defects

This inspection covers various aspects of the home, including its structural integrity, electrical systems, plumbing, and overall condition. The goal is to ensure that the buyer has an accurate understanding of the property’s condition before finalizing the sale.

If significant problems are discovered during the inspection, it may give the buyer an opportunity to renegotiate or even back out of the deal altogether.

Appraisal Contingency:

An appraisal is an important contingency in real estate transactions. It involves having a professional evaluate the value of the property to determine if it aligns with the agreed-upon purchase price.

This step ensures that the buyer is not paying more than what the property is worth. If the appraisal comes back lower than expected, it could potentially affect the financing and may require renegotiation or cancellation of the deal.

Appraisals provide buyers with reassurance that they are making a sound investment and help prevent overpaying for a property.

What happens if the appraisal comes in low

If the valuation of a house is lower, than the agreed purchase price there are outcomes;

1. The buyer and seller can engage in negotiations to potentially lower the purchase price. This is often the step taken to ensure that the transaction proceeds smoothly without requiring financing.

2. Alternatively the buyer can choose to cover the shortfall from their funds. However this may not be a solution for buyers who have limited available cash.

3. Another option for the buyer is to dispute the appraisal and request an opinion. Although taking this route involves some risk since there is no guarantee that a subsequent appraisal will yield a value.

4. In cases where the appraisal falls significantly short it’s possible for the lender to reject granting a loan as they’re unwilling to lend more than what has been appraised for.

5. If all other avenues prove unsuccessful there may be no choice. For the buyer to walk away, from the deal and search for a property.

Financing Contingency:

A financing contingency is a common contingency in real estate transactions. It refers to the buyer’s ability to secure financing in order to purchase the property. 

When a house is listed as contingent on financing, it means that the sale is dependent on the buyer obtaining a loan from a lender.

The buyer’s offer will typically specify a certain time frame within which they must secure financing. If they are unable to obtain a mortgage within this time frame, they may have the option to back out of the deal without any penalty.

This contingency provides buyers with protection and ensures that they can proceed with the purchase only if they are able to secure necessary funding.

Title Contingency:

A title contingency ensures that the property’s title is clear and free of any liens or disputes.

This contingency allows the buyer to review the title search and related documents to ensure that there are no legal issues associated with the property.

If any problems arise during this process, the buyer can request the seller to resolve them before moving forward with the sale.

Kick-Out Clause:

A kick-out clause is often included in contingency agreements for buyers who have a home to sell before purchasing a new one.

This clause allows the seller to continue marketing the property and accept a better offer if one comes along.

If the kick-out clause is triggered, the current buyer typically has a specific timeframe to either remove their contingency by selling their existing home or step aside to allow the new offer to proceed.

Benefits of Contingencies

When purchasing a home, contingencies play a crucial role in protecting the interests of both the prospective buyer and the seller. 

Flexibility in the Sale Process

Contingencies provide flexibility to the buyer by allowing them to perform necessary inspections and assessments before committing to the purchase.

For example, the home inspection contingency allows the buyer to hire a professional inspector to thoroughly examine the property for any hidden issues.

This inspection helps buyers make informed decisions and negotiate repairs or adjustments with the seller before finalizing the sale.

Protecting Financial Interests

Contingencies also serve to protect the buyer’s financial interests.

The appraisal contingency, for instance, ensures that the property’s appraised value aligns with the agreed-upon purchase price.

If the appraisal falls short, the buyer can renegotiate the terms of the sale or even withdraw from the agreement.

Similarly, the mortgage contingency provides a safeguard for the buyer, ensuring that they are not obligated to proceed with the purchase if they are unable to secure financing from a mortgage lender as per the agreed-upon terms.

This contingency allows buyers to explore alternative financing options or withdraw from the deal without facing any penalties.

Addressing Title and Legal Concerns

Contingencies related to title and legal matters offer protection and peace of mind to buyers.

For instance, the title contingency allows the buyer to ensure that the property’s title is clear from any liens, disputes, or ownership claims that could potentially cause issues in the future.

This contingency provides an opportunity to address any title-related concerns before finalizing the sale.

Evaluating the Current Home Sale

Contingencies related to the sale of the buyer’s current home are especially beneficial for those who are looking to move up or downsize.

The home sale contingency allows buyers to make their offer contingent upon the successful sale of their existing property.

This contingency provides a timeframe for the buyer to find a suitable buyer for their current home while not missing out on the desired property.

Home Sale

When a home sale is contingent, it means that the purchase of the house depends on certain conditions being met. 

This could include the buyer selling their current property or securing financing for the purchase.

The seller has accepted an offer from a potential buyer, but the sale is not yet finalized.

 The listing remains active in case circumstances change or if backup offers are needed. Contingent offers provide some flexibility and protection for buyers, allowing them to back out of the deal if specific conditions are not met.

However, it’s important to note that contingent offers can still fall through if these conditions are not satisfied.

How Contingent Offers Work

Contingent offers in real estate involve certain conditions that must be met for the sale to proceed, such as a satisfactory home inspection or securing financing. These contingencies can impact the timeline and potential risks of buying a house.

Potential risks

Contingent offers come with their share of potential risks for buyers. One risk is that the seller may receive backup offers while the property is still under contract, which could lead to competition and potentially losing out on the house.

Another risk is that certain contingencies outlined in the offer may not be satisfied, causing the deal to fall through. This could happen if, for example, a home inspection reveals significant issues or if the buyer’s financing falls through.

In this example the seller’s might not be willing to make repairs or lower their sales price to offset the dollar amount needed for repairs. 

It’s important for buyers to carefully consider these risks before making a contingent offer and ensure they have a contingency plan in case things don’t go as planned.

Negotiating contingencies

Buyers and sellers in a real estate transaction must negotiate contingencies, which are clauses that outline specific conditions that must be met for the sale to proceed. 

These negotiations involve discussing and reaching an agreement on factors such as inspection results, repairs, financial requirements, and other terms outlined in the offer.

However, there are situations where contingencies need to change. Here are some options that prospective buyers and their real estate agents can explore:

1. Pre-Inspection:

Rather than including a home inspection contingency in the purchase agreement, prospective buyers can choose to conduct a pre-inspection before making an offer. This allows them to identify any potential issues upfront and make an informed decision on whether to proceed with the purchase or negotiate repairs or price adjustments.

2. Higher Earnest Money Deposit:

Increasing the amount of earnest money deposit can be an alternative to the traditional financing contingency. By offering a larger deposit, buyers demonstrate their seriousness and financial stability, which may make sellers more willing to accept the offer without a financing contingency.

3. Shortened Timeline:

In some cases, buyers can choose to shorten the contingency timeline to make their offer more attractive. This means reducing the number of days for contingencies, such as appraisal and inspection, to provide sellers with a quicker resolution and potential sale close.

Depending on the market conditions and buyer’s risk tolerance, it may be possible to waive certain contingencies altogether. 

For example, buyers who have thoroughly researched the property and are confident in its condition may opt to waive the home inspection contingency. However, it’s crucial to carefully evaluate the implications and seek advice from a real estate professional before considering this option.

Contingency Timeframes

In the world of real estate, time is of the essence. When it comes to contingencies, there are specific timeframes that both buyers and sellers need to be aware of. 

Inspection:

The inspection contingency allows the prospective buyer to hire a professional home inspector to thoroughly assess the property’s condition.

This deadline is typically stated in the purchase agreement and gives the buyer a specific timeframe to complete the inspection process. 

It might be as long as 10 days or in some cases, as few as one or two.

Financing:

The financing contingency protects the buyer in case they are unable to secure a mortgage loan to complete the purchase.

It provides a specific timeframe for the buyer to obtain loan approval from a mortgage lender.

 It also gives the seller clarity on the buyer’s ability to secure the necessary funds. In many cases financing take over 30 days.

Appraisal Contingency:

The appraisal contingency allows the buyer to ensure that the property’s appraised value aligns with the agreed-upon purchase price.

It typically provides a timeframe for the buyer to conduct an appraisal and request adjustments if needed.

As stated earlier, if the appraisal comes in lower than expected, it provides an opportunity for renegotiation.

Sale of Buyer’s Current Home:

In some cases, buyers need to sell their current home before completing the purchase of a new one.

The sale of the buyer’s current home contingency provides a timeframe for the buyer to find a suitable buyer for their property.

Title Contingency:

The title contingency gives the buyer a specific timeframe to review the property’s title report and address any issues that may affect ownership.

What to Expect from a Contingent Home

Limited viewing options during the contingency period. Potential buyers may only be allowed to view the home once or at specific times, as the seller wants to minimize disruptions and avoid excessive showings while under contract.

Most sellers have no reason to believe the sale will fall through. 

Limited viewing options

Buyers should be aware that when a house is listed as contingent, their viewing options may be limited. This means that the property is under contract and the seller has accepted an offer, but the sale is still subject to certain conditions being met.

As a result, some sellers may restrict showings or open houses while they wait for these conditions to be fulfilled. It’s important for potential buyers to understand that limited viewing options are a common part of the contingent statusand shouldn’t necessarily discourage them from considering the property.

Possibility of competing offers

Multiple buyers may be interested in the same contingent home, leading to the possibility of competing offers. 

This means that while a buyer’s offer is being considered, other potential buyers may also submit their offers to the seller.

As a result, buyers need to be prepared for the potential competition and understand that they might need to adjust their offer or negotiate with other interested parties.

 It’s important for buyers to work closely with their real estate agent and be proactive in making a strong and compelling offer to increase their chances of securing the property they desire.

Potential delays in closing

Contingent offers on a house can sometimes lead to potential delays in closing. This is because the sale is dependent on certain conditions being met, such as financing approval or the completion of necessary repairs.

These conditions may take time to fulfill, causing the closing process to be prolonged.

 It’s important for buyers and sellers to be aware that these delays are possible when dealing with contingent offers, and to plan accordingly to avoid any inconvenience or frustration.

Making an Offer on a Contingent Home

Consider the factors and be prepared for potential backup offers when making an offer on a contingent home. Read on to learn more about the importance of understanding contingencies in real estate.

Factors to consider

 First, think about the specific contingencies outlined in the offer. Are they reasonable and achievable? Assess whether you’re comfortable with these conditions being met before proceeding with the purchase.

Second, consider the possibility of backup offers. Contingent homes can still attract potential buyers who may submit backup offers if the primary offer falls through. Finally, it’s crucial to have a clear understanding of contingencies in real estate.

Familiarize yourself with common contingencies and how they might impact your buying process. By carefully considering these factors, you can make an informed decision when pursuing a contingent home.

Consider whether the specified contingencies are practical and realistic for you as a buyer.

For example, some sellers will require a buyer to submit an offer with an appraisal waiver!

Also bear in mind that other potential buyers may be interested in submitting backup offers if your initial offer fails to proceed. 

Difference between Contingent and Pending

Contingent and pending are two terms that are often used interchangeably in the real estate industry. Both indicate that a property has an accepted offer, but there is a slight difference between the two.

When a house is listed as contingent, it means that the sale of the property is dependent on certain conditions being met. The buyer can still back out of the deal if these conditions are not fulfilled.

On the other hand, when a house is listed as pending, it means that all contingencies have been satisfied and the sale is in its final stages of completion.

In this stage, it’s less likely for the sale to fall through unless unforeseen circumstances arise.

Final Thoughts

Contingent means that a house has an accepted offer, but the sale is dependent on certain conditions being met. It provides buyers with flexibility and protection, as they can withdraw their offer if the contingencies are not fulfilled.