What Does ‘Contingent’ Mean in Real Estate?
What does ‘contingent’ mean?
Just imagine that you have found a home you want to purchase, and you are putting together your offer to submit to the seller. Naturally, you will want to consider adding contingencies to protect you financially as the buyer in this process. After you make your offer with any contingencies you deem necessary, the seller must accept, decline, or counter your offer.
Bankrate.com explains that "In real estate, a contingency refers to a clause in a real estate purchase agreement specifying an action or requirement that must be met so that the contract can become legally binding. Both the buyer and seller must agree to the terms of each contingency and sign the contract before it becomes binding".
Contingencies offer you added protections as the buyer and are meant to safeguard you. But making sure that you use the correct one(s) is vital since it could make the negotiation process more difficult if there are too many or if the seller feels overwhelmed by the stipulations.
So the best way to make sure that you are prepared and know all of the facts before slapping contingencies into the contract is to educate yourself. Learn what kind of contingencies there are, which ones you should most consider, and take your agent's advice during the drafting of the contract.
What are the most common types of contingencies?
Like every buyer and home is different, the number of contingencies utilized in the offer varies from sale to sale. There are two essential contingencies that you should consider adding to your contract in the very least:
The remaining contingencies are:
- Appraisal Contingency
- Title Contingency
- Kick-Out Clause
- Home Insurance Contingency
- House Sale Contingency
Financing or mortgage contingency
The financing clause is essential for several reasons. First, it defines a set-closing timeline. For example, let's say that you have this clause in your contract, and when the deadline comes around, you have yet to be approved for the loan you need or are unable to come up with the finances necessary for the purchase. The financing contingency protects you in this situation by ensuring that you get a full refund on your earnest money deposit, even if you can't secure the funding. The financing contingency helps you avoid a penalty fee in this kind of scenario, and the seller can then choose a different buyer after putting the house back on the market.
Perhaps most obviously important, the inspection contingency allows for walk-throughs and property inspections during a specified time of usually between 7-10 days. The inspection contingency protects the buyer from hidden or surprise home issues that could be costly in the short or long term. If the inspection comes back and you are made aware that one or more problems exist and need repair, this contingency allows you to go to the seller with a request for a discount on the home to allow for the cost of the repairs you would have to cover once you have purchased the home. Alternatively, you could negotiate for the sellers to fix the issues before you purchase, or you can back out of the deal altogether.
The appraisal contingency is wise to include in the contract. You can have the appraisal done by a licensed appraiser who can give a written report that consists of the home's value. The appraisal contingency is a necessary clause to include in your contract.
For example, you could be looking at buying a house with an asking price of $650,000, but after a home appraisal is completed, the appraisal values the house at $500,000. In this situation, the bank will only provide a loan based on the home's appraisal value. Now you, the buyer, would be responsible for coming up with a $150,000 appraisal gap to make the purchase. Including an appraisal, contingency is just another innovative way to protect yourself and your investment.
Would you want to buy a house from someone who isn't the actual legal homeowner? Especially if that held potential legal ramifications like a lien? A title search is typically conducted by a title company or real estate attorney to establish current homeownership. The home cannot sell without this being resolved.
Occasionally a lien will be placed on the property by a lender who still is expecting payment for a past loan. Even though the seller would be responsible for paying the lien and settling that debt, this process takes time because the house cannot be sold until the lien is paid. As the buyer in this scenario, the title contingency protects you by allowing you to walk away from the contract or closing if this issue is not resolved.
House sale contingency
The house sale contingency is extremely common. In this scenario, you are a homebuyer trying to coordinate the purchase of your new home alongside the selling of your current home. For example, let's say that you cannot sell your current house within the time frame anticipated. Having the house sale contingency ensures that you can back out of the deal on the new home without incurring any penalties.
The house sale contingency helps the buyer in the above scenario, but what protection do you have if you are the seller in a situation like this? The kick-out clause is your answer and will help protect you as the seller. This clause ensures that you would keep the house on the market, and if the potential buyer doesn't remove the house sale contingency within your agreed-upon time frame, you are free to exit the contract and choose another buyer.
Home insurance contingency
Lenders and occasionally sellers will require that you obtain homeowner's insurance and include this requirement in the sales contract. What if you go to apply for homeowner's insurance and you hit a snag because the insurance company is hesitant to insure the property due to the home's location in a particular region. Typically, high-risk locations to ensure include areas with a lot of crime and weather hazards associated with specific areas like flooding, tornados, etc. For natural disaster protection, you may have to purchase a separate insurance policy to cover weather-related damage.
What is the difference between contingent and pending?
A contingent home is still visible on the market even though the seller has accepted an offer that contains contingencies. If the agreed-upon time frame rolls around and the potential buyer has not met the contingencies, the owner is free to go with another buyer. The owner has left the contingent home on the market to allow for this very scenario. If a house is pending, the buyer has met any contingencies, and the sale is in progress. Your chances with a contingent home are better than with a home that is listed as pending.
Can you put an offer on a contingent home?
In many cases, you can put an offer in on a contingent home, but doing so does not guarantee anything. If something goes wrong and the potential buyer cannot meet the deadline initially set, the seller is free to choose another buyer, which means you have put yourself at the head of the line to be the runner-up. Therefore, you will need to go in with realistic expectations and understand that you may come away empty-handed. But, if that first deal falls through, you are most likely going to be next up.
How to beat a contingent offer
The first option seems to be the most obvious: offer slightly more than the asking price if this move seems wise concerning market trends. Do your research before going in hot and potentially offering more than market value for the place. If you have put in an offer on a contingent home hoping to win in the end, Business Insider suggests that "to boost your offer's close-ability, it helps to be informed about the most common deal killers:
mortgage approval failures, and
condition problems revealed by inspections
are the top spoilers that ruin home sale transactions that are already in contract. If you're going to try to win or at least compete with other offers on close-ability, it's critical that you strike an appropriate balance between protecting your own interests and aggressively assuring the seller that you have done everything within your power to minimize or eliminate the risks that you will later have to back out of the transaction."
Home Offer Not Accepted? What Happened? What's Next? Home Buying Tips is a great resource you will want to check out to avoid common pitfalls that are linked to rejected offers. Get familiar with the reasons your offer or someone else's, for that matter, might fail so that you can side-step having to learn the hard way.
How will you know if you should add contingencies to your offer?
While adding too many contingencies to your offer can raise red flags to the seller or make your offer less appealing, not having any listed can also be a red flag. Whether you are unsure if you will be able to get the loan amount you need to purchase the home, you are concerned about the appraisal value, or you are worried about potential repairs or hidden costs, contingencies are a great tool to protect both the buyer and seller.
Be sure to discuss your concerns with your agent before deciding what contingencies you should include in your purchase agreement. But now that you understand some of your options and what contingencies you can utilize, you can be involved in the conversation in a more enlightened and empowered way.