What Does Contingent Mean in Real Estate?
The word "contingent" means something that is dependent on certain conditions or circumstances. When it comes to real estate, the term is usually applied to home offers, meaning that that closing is "dependent on certain circumstances."
It's an important term to know if you're about to buy or sell a home because it may come up in negotiations. It's essential for both the buyer and seller to understand what contingent means in order to avoid a contract breach. What does contingent mean in real estate in different circumstances? This guide covers what you need to know.
Real Estate Contingencies Explained
Many people confuse an offer being contingent with it being "pending." A pending offer means that a sale is moving forward because all conditions were successfully met. What does contingent mean in real estate listing? A contingent offer means that the buyer and seller have agreed to move forward as long as certain predetermined conditions are met. A seller's agent will keep a property actively listed as "contingent" in case contingencies aren't ultimately met.
Common Types of Contingencies in Real Estate
Contingencies can vary widely based on the circumstances of the buyer and seller, the flexibility of the buyer and seller, and other factors. Here's a glance at common types of real estate contingencies.
Inspection Contingency
This contingency gives the buyer the right to have a certified home inspector assess the condition of the home. The inspector might be looking for structural damage, mold, and other signs that could make a home a bad investment. If the inspection uncovers serious or expensive flaws that have not been outlined in the contract, the buyer has a right to back out without forfeiting their earnest money. In some cases, the buyer and seller can negotiate price instead of ending the deal.
Financial Contingency
Also known as a mortgage contingency, this contingency gives the buyer a window of time to obtain financing. Buyers who have already been preapproved should generally move through this contingency easily. However, a dip in credit score, job change, or other sudden financial shift could hold up the process.
Appraisal Contingency
Lenders can't offer mortgages that are higher than a home's current appraised value. To verify a home's true value, they utilize third-party appraisers. The no appraisal contingency is especially important in hot markets where sellers may inflate asking prices. What happens if the appraisal comes in too high? The appraisal contingency will allow the buyer to walk away. A buyer can also consider putting down more cash to make up the difference if they still want the home.
Title Contingency
This contingency gives the buyer time to verify that a home comes back with a clean title that is free of mortgage liens, easement issues, or other claims against a title that could make closing difficult.
Home Sale Contingency
This contingency states that a transaction can only move forward once a buyer sells their current home. It's not something first-time homebuyers have to think about. For buyers who do already have homes, not all sellers are willing to deal with this contingency. Fortunately, lenders do provide financing options that make it possible to finance a new home while selling a current one.
The Role of Contingencies in Real Estate Negotiations
In some cases, buyers waive all contingencies in order to make more attractive offers to sellers. However, it's important to know that waiving an inspection can be risky. If you're buying a home using a mortgage, keep in mind that your lender won't allow you to waive your appraisal contingency.
What if you're a buyer who needs to ask for contingencies? There are still ways to make your offer appealing. This can include:
- Be flexible with your closing date.
- Provide a larger earnest deposit.
- Go above asking price with your offer.
- Include an escalation clause in your offer that automatically raises your offer if the seller receives a higher offer.
Sellers might also be wondering how to react to offers with multiple contingencies. Ultimately, a seller's goal is to accept the best offer. Work with your real estate agent to determine how a contingent-heavy offer actually weighs against a no contingency offer with all factors in place.
Advantages of Contingencies for Buyers
Contingencies help buyers by giving them a way to either void or alter a contract under certain circumstances without losing earnest money. The appraisal, inspection, and title contingencies are critical for avoiding bad investments. Notably, an inspection contingency ensures that you won't get stuck with a home that is either unsafe or requires costly repairs. Financing contingencies give a buyer an opportunity to stake a claim on a home while they sort through the specifics of getting mortgage approval.
Challenges of Contingencies for Sellers
While contingencies are fairly common in real estate transactions, they can still cause a fair bit of stress. For sellers, contingencies can extend the closing process. For example, an inspection contingency that reveals that a home has termites or high radon levels brings the buyer and seller back to the negotiation table. The seller may need to remediate the issues that are discovered if they want to be able to sell the home.
There are some ways to mitigate the impact of contingencies on a home sale. For both the buyer and seller, preparation is key. The seller should already know about all of the issues that may be present in a home before listing it on the market. The seller should also be transparent about these issues. In some cases, the answer is to fix the issues before listing the home. In others, the answer may be to lower the price to reflect the need for repairs.
Buyers can mitigate contingency impact by being as financially prepared as possible before making an offer. They should also be prepared to decide if they want to walk away from a home or renegotiate the offer if something is revealed about the home during an inspection.
How to Manage and Resolve Contingencies
All contingency resolutions should be communicated through your real estate agent. Don't attempt to contact the other party to "convince them" of anything. The most important thing to remember for either side is that you need to follow what's outlined in the contract in order to avoid forfeiting earnest money, losing out on a home you want, or being legally liable in some way.
If the buyer and seller cannot get to a point where contingencies are met, they may end the contract without the buyer losing their earnest money. Unless the seller decides to remove the home from the market, the home will be considered an active listing again.
Removing or Waiving a Contingency
Waiving a contingency means that you forfeited your right to it when making your initial offer. A buyer can also remove an existing contingency from their offer at any point before closing. This means that the buyer is agreeing to pay the purchase price regardless of whether or not the original contingencies are satisfied. This most commonly happens when buyers drop financing contingencies after being approved for mortgages. However, buyers sometimes drop contingencies upon a seller's request in a competitive market.
The specifics of how to remove a real estate contingency vary by state. Ramifications can be serious in every case. Waiving a contingency from the start often means that you are giving up your right to have a home inspected or appraised. That means that you may be forced to move forward with a purchase even if a home is either overpriced or in poor condition unless you want to forfeit your deposit. The seller could also potentially pursue legal consequences against you.
Similar risks are present when removing a contingency. For example, waiving your financing contingency before you obtain your mortgage could mean that you'll still be legally obligated to purchase the home.
FAQs About Contingent in Real Estate
Can you outbid a contingent offer?
No, it's not possible to outbid a contingent offer. The seller has already accepted an offer that is waiting on certain conditions to be satisfied before closing. However, some sellers will accept backup bids while engaged in a contingent offer.
How long do contingent offers last?
While this varies by case, the contingent period generally lasts from 30 to 70 days.
What is the difference between contingent and pending?
"Pending" means that the buyer and seller have agreed to close after an offer has been accepted on a home with all contingencies met. "Contingent" means that the buyer and seller are waiting for certain conditions to be met before they can agree to close.