What does “Contingent” in Real Estate Really Mean

Contingency Defined

A contingent home sale refers to a situation where a potential buyer makes an offer to purchase a property, but that offer is contingent upon certain conditions being met.

These conditions typically involve specific milestones that need to be achieved before the sale can be completed.

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

They allow for certain conditions to be fulfilled, ensuring that the sale moves forward smoothly.

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

Types of Contingencies

Inspection Contingency: This contingency allows the buyer to conduct a thorough inspection of the property.

It gives them the opportunity to identify any potential issues or defects that may affect their decision to proceed with the purchase.

Appraisal Contingency: An appraisal contingency ensures that the property has a sufficient appraised value.

It protects the buyer from paying more than the property’s worth and allows them to renegotiate or back out if the appraisal falls short.

Financing Contingency: This contingency allows the buyer to secure a mortgage loan to purchase the property.

If the buyer is unable to secure financing within the agreed-upon timeframe, they can back out of the deal without any financial repercussions.

Sale Contingency: A sale contingency is often used when the buyer needs to sell their current home in order to purchase a new one.

It allows them to make an offer on a new property, with the condition that their current home sells first.

This contingency provides additional time for the buyer to find a buyer for their current property.

The Impact on Buyers and Sellers: For buyers, a contingent home sale gives them the flexibility and protection to thoroughly assess the property and its condition before committing to the purchase.

It allows them to conduct inspections, secure financing, and sell their current home if necessary.

On the other hand, sellers may find that accepting a contingent offer provides them with fewer guarantees.

While it may delay the closing or introduce additional uncertainties, it also gives them the opportunity to continue marketing their property and potentially receive a backup offer in case the initial offer falls through.

Benefits for Buyers

One common condition that buyers encounter is a contingent home sale.

Understanding the benefits of a contingent home sale can help buyers make informed decisions and potentially secure their dream home. 

Increased Time to Sell Current Home: A contingent home sale allows buyers to include a contingency clause in their purchase agreement, which means their offer is dependent on the sale of their current home.

This provides buyers with the necessary time to market and sell their existing property without the pressure of holding multiple mortgages.

By availing themselves of this option, buyers can avoid the financial strain that can arise from carrying two mortgages simultaneously.

Protection against Losing Out on Preferred 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.

However, a contingent offer can still be appealing to sellers if there are no other competing offers or if the property has been on the market for an extended period.

This allows buyers to maintain their interest in the property while working through the sales process of their current home.

Flexibility in Negotiating Purchase Price: During the contingent period, buyers typically have the opportunity to negotiate the purchase price based on the outcome of their own home sale.

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 be a significant advantage in negotiations and may help buyers secure a more favorable purchase price.

Avoid Rushed Compromises: However, by utilizing a contingent offer, buyers can feel more confident in waiting for the right home to become available.

This allows them to avoid making rushed compromises and instead focus on finding a property that truly meets their needs and preferences.

Risks for Buyers

Financing Challenges: One of the primary risks for buyers in a contingent home sale is dealing with financing challenges.

If the sale of their current home is contingent on purchasing a new one, they may face difficulty securing a mortgage or meeting the lender’s requirements.

This can delay the process or even jeopardize the entire transaction, leaving the buyer in a difficult position.

Competition from Backup Offers: This means that if a more attractive offer comes along, the buyer with a contingent offer could be out of luck.

It’s essential for buyers to understand that they may face competition and have a backup plan in case their offer falls through.

Potential for Multiple Contingencies: Sometimes, a contingent home sale may involve multiple contingencies.

For example, the buyer may need to sell their current home, secure financing, and complete a satisfactory home inspection before proceeding with the purchase.

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 a cascade of 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 benefits of a contingent home sale is that it can result in a quicker sale.

When a seller accepts a contingent offer, it means that the buyer has made their offer dependent on certain conditions being met, such as selling their current home.

This can be advantageous for sellers who are looking to sell their property promptly.

Higher Sale Price: Contingent offers often come from motivated buyers who are eager to secure the home they desire.

These buyers may be more willing to pay a higher purchase price to ensure their offer is accepted.

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

Increased Flexibility: Accepting a contingent offer can provide sellers with increased flexibility in their own home-buying process.

If sellers are also looking to purchase a new home, accepting a contingent offer allows them to synchronize the closing dates of both transactions.

This can help prevent any gaps in housing, providing a smoother transition from one home to another.

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

Increased Buyer Pool: Interested buyers who have not yet sold their current homes may be more inclined to submit an offer when they see that the seller is willing to consider contingent offers.

This expands the seller’s market and increases the chances of receiving multiple offers, creating a competitive environment that could ultimately lead to a higher sale price.

Mitigated Risk:  By including a “kick-out clause” in the contract, sellers maintain control and can continue marketing their property to potential buyers. If a non-contingent offer is received, the seller has the option to accept it and move forward.

Risks for Sellers

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

This is because the buyer needs to complete their own home sale before proceeding with the purchase of your property.

As a result, you may experience delays in finalizing the sale and receiving the proceeds from the transaction. 

Potential for Multiple Contingencies: In some cases, a prospective buyer may have multiple contingencies in their offer, such as a financing contingency or an inspection contingency.

This can add further complexity to the transaction and increase the chances of delays or complications. 

Uncertainty of the Buyer’s Sale: When accepting a contingent offer, you are essentially relying on the sale of the buyer’s current home.

This introduces an element of uncertainty, as you have no control over the buyer’s ability to successfully sell their own property.

If their sale falls through or faces significant delays, it can jeopardize the entire transaction.

Limited 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.