Purchasing a home remains one of the best ways to accumulate wealth, and real estate sales are on the rise. However, despite the fact that 5.64 million existing homes are expected to change hands in 2020, according to data from the National Association of REALTORS®, there are no guarantees in any real estate transaction. Everyone is surprised by how the process will unfold because every seller, buyer, situation, and house is unique.
Given the amount of uncertainty, the size of the acquisition, and the number of parties involved, you want to protect yourself against the unexpected as a buyer. That’s why most home sales are “contingent” on what happens next, allowing buyers to back out if something goes wrong as the sale progresses through the process.
IN REAL ESTATE, WHAT DOES CONTINGENT MEAN?
“Contingent” indicates “dependent on particular circumstances” in any context. When a house is classified as contingent in real estate, it signifies that an offer has been made and accepted, but certain extra requirements must be completed before the deal is finalized.
For example, if a seller offers a specific price and you, as the buyer, say the price is acceptable (assuming the house inspection is OK), you have entered into a contingent real estate contract. In this situation, the sale of the house is contingent on the inspection finding no faults that were not specified in the contract.
HOW DOES A CONTINGENT OFFER WORK?
With a contingent offer, you have declared that a certain condition must be met before the transaction may proceed. If it does not, the contract is null and invalid, and the seller may accept a backup offer received while the sale remained contingent. Contingencies are frequently utilized to shield the buyer from bad house listings or unanticipated complications throughout the real estate transaction.
Returning to our previous scenario, suppose we make the offer conditional on the house inspection revealing a roof life of 15 years left. If the inspector determines that the roof has just 7 years left, the home will be marked as having an active contingency status. The property seller may then opt to repair the roof or lower the price, or the potential purchasers may decide to cancel the contract, which they may do without penalty because the contingency was in place.
WHAT ARE THE MOST COMMON REAL ESTATE CONTINGENCIES?
Keep in mind that a seller may prefer that the offer be without any conditions. Of course, the buyer wants to create an offer that protects them by containing contingencies, since if you back out of your offer without a contingency escape clause, you may lose the earnest money you provided to cement the sale.
Including contingencies might be problematic, especially in a “hot” market when there is a lot of house purchasing activity. Other prospective buyers may make an offer without a condition, making their offer appear more acceptable and more likely to be accepted by the seller.
For example, if you have a contingency that your own house must sell in order for you to finalize another property purchase, but another buyer’s offer does not, the seller may decide that they do not want to wait. You should use the contingency clause sparingly to ensure that your offer is as appealing as possible.
Are you wondering what contingencies you should think about? Here are a few examples.
CONTINGENCY IN HOME INSPECTION
The house inspection contingency permits a home inspector to analyze the state of the home, inspecting all factors that may not be obvious to the naked eye or that the current buyer may not consider, such as grading or flashing. If the inspection discovers major problems in the home’s condition that have been specified in the contract, the buyer may withdraw from the transaction, or the buyer and seller may discuss who would pay for the repairs.
In other words, even if you have a home inspection contingency, you don’t have to walk away because the house has a problem. You and the seller may be able to reach an agreement on how to cover and handle the repairs.
A mortgage contingency provides the buyer with a set amount of time to acquire financing. The good news is that this is a funding risk that can be mitigated by conducting basic due diligence. To begin, be certain that you have been preapproved for a mortgage as a buyer, rather than merely prequalified.
Because it includes rather significant documentation upfront to ensure your finances are in line, preapproval brings you much closer to actually securing the mortgage. But keep in mind that just because you’re preapproved doesn’t mean you’ll qualify for a mortgage. Once you’ve made an offer, you’ll need to check in with your lender.
Ideally, all of the documentation will fall into place because you have already completed the majority of it during the preapproval step. However, there are still factors that can throw you off, such as if you’ve changed jobs, had a drop in your credit score, or experienced another financial issue that unexpectedly makes you a less worthy candidate. To avoid unpleasant surprises when you finalize your mortgage, it’s critical to take excellent care of your finances during this phase.
CONTINGENCY IN APPRAISAL
When you get a mortgage, the appraisal contingency comes into play the most. Given the values in the neighborhood, the seller’s asking price may be outrageous, and you may be more than willing to pay it. However, the asking price does not always reflect the worth of the house. Lenders demand an appraisal, which is a third-party assessment of the home’s true value.
Even if all parties agree on a sale price, the lender cannot provide you a mortgage for more than the home’s appraised value. Meeting that appraisal figure might be difficult in an overheated or fast shifting real estate market, but it doesn’t mean you’re out of luck.
You may be able to overcome this if you have the resources to pay extra ahead to make up the difference between the amount of the mortgage loan and the agreed-upon purchase price, or if you can renegotiate.
CONTINGENCY IN TITLE
Many purchasers have been duped by this deceptive piece of paper. The title of the house tells who owns it and who has owned it in the past. However, not all residences have “clean titles.” They may have encumbrances such as easement issues or a previous mortgage lien.
Any disputes against the title might make a buyer’s acquisition hazardous. The good news is that title searches should reveal any issues prior to closing. Even if there is a problem that you can fix, it’s a good idea to buy title insurance to protect yourself against future claims.
CONTINGENCY FOR A HOME SALE
This contingency is tied to the buyer’s financial status and states that the transaction will only go through if your present house sells first. While this can protect you, it’s common for sellers to reject it in a seller’s market because the seller knows there may be another buyer who doesn’t have this restriction.
Of course, this does not imply that you must have the funds to purchase the new home before selling your old one. Your lender may be able to assist you with a “bridge loan” or other financial strategies.
Another option is to request a later-than-normal closing date, which would allow you extra time to sell your home. Remember that some sellers may reject your offer if they want to close the transaction fast, but it may be appealing to other sellers who are looking for a new house or who want to continue the school year in their current home, for example.
WHAT IS A CONTINGENCY IN HOUSE HUNTING?
You’ll be more prepared when you come across an active listing with a contingent status when house hunting now that you’ve learned about common contingencies.
Perhaps if you have your heart set on a certain property, your real estate agent will undoubtedly advise you to remain looking at houses and even make other offers while the house you desire is on the market as a contingent listing. This is especially important in real estate markets with low housing inventory and a large number of buyers.
The last thing you want is to put all your eggs in one basket and have your offer rejected because a contingency failed to materialize. You may also want to negotiate clauses that limit the seller’s ability to accept fresh bids. Always rely on your real estate agent to assist you in negotiating the best terms for your specific situation.
CONTINGENT WITH A KICK-OUT
While they wait, sellers may request a kick-out clause. Sellers can continue to consider offers in a contingency with a kick-out, and they will generally prefer offers with fewer contingencies than the first offer.
While contingencies can help protect you, there is another incentive to make your offer with as few as possible. The good news is that the sellers cannot force you to leave simply because they discover a higher offer. They must tell you and provide you with a reasonable amount of time to remove the contingencies.
CONTINGENT WITH NO-KICK-OUT
In a buyer’s market, on the other hand, sellers may accept a contingency with a no-kick-out condition, which prevents them from accepting new bids while the contingencies are resolved.
WHAT IS THE DIFFERENCE BETWEEN PENDING AND CONTINGENT?
Contingent and pending are two terms that are frequently used interchangeably, but they refer to different stages of the sales cycle.
The seller has accepted an offer in the contingent sale, but everyone is still working out the details. The sale eventually switches to “pending,” indicating that the concerns have been handled and the transaction is nearly complete. At this point, both parties are merely waiting for paperwork to be completed so that the sale may proceed to “close.”
You’re almost there if you’re at the pending stage. Because they are contractually prohibited from accepting offers, most sellers will not continue to show the home while it is pending. The house is nearly yours!
THE BOTTOM LINE: WHY ARE CONTINGENCIES IMPORTANT?
Buying your ideal home may be stressful – after all, it’s likely to be the largest purchase you’ll ever make until you buy another property, and it can be frightening to take the plunge. Fortunately, when you make an offer, there are safeguards in place in the form of contingencies that can protect you as you progress through the house purchasing process. However, as you can see, they might also have drawbacks if the seller refuses to accept an offer from them.
Do you want to know more about the home-buying process? Check out our collection of house purchasing articles that cover a variety of topics, and don’t forget to consult with your real estate agent, who can assist ensure you have all of the knowledge you need for this life-changing transaction.