What Does Contingent Mean in Real Estate? Know What’s What
By: ROS Team
If you’re new to real estate vernacular, you may have heard the phrase “contingent in real estate” and wondered what it meant. It is important to be familiar with contingency anytime you buy or sell a property.
1- What Does Contingency Mean
2- Home Inspection Contingency
3- Mortgage Contingency
4- Appraisal Contingency
5- Home Sale Contingency
6- What Does “Pending” Mean
7- FAQs
What Does Contingency Mean?
Simply put, contingencies are conditions that must be met before a real estate transaction can be completed. Contingencies allow the buyer or seller an out without financial penalty in the event specific requirements are not met. Depending on which side of the equation you are on, a contingency may or may not work in your favor.
For the seller, contingencies do more harm than good. The buyer maintains their right to cancel the real estate transaction without consequence up until the very last minute, even if the seller has done their best to meet all the requirements.
Unless you stand to benefit financially from having one, you should refrain from agreeing to contingencies.
Here are Some of the Most Common Contingency Offers in Real Estate:
Home Inspection Contingency
When the buyer makes an offer and the seller accepts it, the deal also becomes subject to an acceptable home inspection. The seller has an ethical obligation to disclose all details about the property. However, if issues were found during the home inspection that were not initially discussed before the buying contract was signed, the buyer may ask the seller to revisit or even revise the agreement.
With a home inspection contingency, the buyer may ask the seller to fix the issues identified during the inspection before closing on the deal. The buyer may also use the findings as a reason to negotiate a lower sales price. If the parties reach a new agreement, the deal proceeds as planned. If the parties are unable to agree, the seller will need to refund the buyer’s earnest money and the deal is canceled.
Mortgage Contingency
When buyers purchase a home with a loan, they are supposed to make sure that the loan funds and that funds are distributed to the seller upon closing. If this doesn’t happen, the buyers lose the bid on the house and any earnest money paid.
Appraisal Contingency
Appraisal contingencies are interesting; with this type of contingency, the buyer applies for a loan, but the mortgager does not approve the loan amount until a third party appraises the property to ensure it’s worth the value of the loan. If the appraised value is lower than the loan amount, the bank only approves the loan for the appraisal amount.
The buyer would have to come up with the remainder of the home’s cost. If the buyer is unable to do so, the offer is voided and the seller keeps the earnest money.
Home Sale Contingency
In this scenario, a buyer would have to sell their current home by a certain time to purchase their new home. In doing so, the buyer would need to show proof to the lender that they can move forward with the loan process for the new home because the loan on the previous home was paid off. If the buyer is unable to sell their home within the required period, the lender can reject their loan application.
Placing a Property Under Contract
When there is a pending real estate deal that’s dependent on contingencies, the property is said to be under contract. There are no legal consequences for backing away when a deal is under contract.
A buyer can extend an offer for a property that is under contract; their offer may be accepted if the initial offer falls through.
What Does “Pending” Mean?
A real estate deal is said to be pending when the deal is under contract but there are contingencies in place that have not yet been met.
Although it’s not common, a real estate deal can still fall through even if all conditions are met. Sellers usually don’t accept new offers when there’s a deal pending, but you have nothing to lose by making one.
Should Sellers Agree to Buyer Contingencies?
The seller is under no obligation to accept a buyer’s contingencies. However, not allowing the option could distract buyers. If buyers are barred from making an offer with contingencies, they are likely to move on to another property. So sellers should decide whether or not they will accept a buyer’s contingencies beforehand.
Can Buyers Make Contingent Offers on Houses?
If you are interested in a property that is on a contingency, you may still make an offer. After all, there is no penalty for putting your hat in the ring. If the deal falls through for some reason, you may get the chance to buy the property.
However, when deals fall through, the situation becomes complex. You should consult with your agent before extending your offer.
FAQs – Contingencies in Real Estate
What is the Difference Between Contingent and Pending?
A contingency is a stage in which the buyer and seller have agreed to certain requirements before finalizing a deal. As a result, the deal on the property is considered “pending” until the required conditions are met. The property will no longer be an active listing while in the “pending” stage.
What do “No Contingencies” Mean in Real Estate?
A non-contingent offer on a house indicates that the buyer has not included any contingencies in their offer.
What are the Most Common Contingencies in Real Estate?
The four most common contingencies are:
- Appraisal
- Home Inspection
- Home Sale
- Homeowners Insurance
How long does a House Stay in Contingent Status?
A home sale contingency offer typically lasts 30 – 90 days. The length of time is specified in the purchase agreement.
How can you turn a Contingent deal into a Pending State Quickly?
The length of time it takes to convert a contingent deal into a pending one varies. The more contingencies included in a deal, the more time it will likely take to get to the pending state.
Moreover, to ensure that this process completes in a specific time, you’ll have to add a kick-out clause. Kick-out clause empowers the seller to end the deal if the buyer doesn’t meet contingencies by the deadline.
Can a Seller Cancel the Contingent Offer?
Yes, a seller can cancel a contingent offer. To save yourself the financial penalty, you’ll need to have a valid reason for canceling.
How often do Contingent Offers Fall Through?
Fortunately, contingent offers do not fall through often. In fact, less than 5% of contingent offers fall through.
Conclusion:
Home contingencies are common; it’s not unusual to run across a home or two that’s under contingency when looking for a new home. If the house of your dreams is listed as having contingencies, consult with your real estate agent about whether you should still submit an offer.
