What is Contingent in Real Estate?
What is contingent in real estate? This question inevitably comes up when purchasing a commercial or residential property.
Navigating the real estate world is a journey brimming with opportunities and potential pitfalls. One crucial aspect of the property buying process that often raises questions among prospective buyers is the concept of a contingent offer on a property.
According to data from the National Association of Realtors, an impressive 5.95 million existing properties changed ownership in 2022.
However, the road to sealing a property purchase is far from guaranteed. Each real estate transaction is distinct, with its unique blend of sellers, buyers, situations, and properties.
When you’re on the buyer’s side of the deal, it’s critical to shield yourself from unforeseen hitches. For this reason, many home sales come with a contingency clause that provides buyers with a safety net should the process encounter turbulence. This article will delve into the semantics and practical implications of ‘contingency’ in the realm of real estate transactions.
What is Contingent in Real Estate?
In the real estate world, a property status termed as ‘contingent’ implies that the seller has accepted an offer, but the deal is conditional on specific circumstances. If you, as a prospective buyer, agree to the seller’s price, provided the home inspection results are satisfactory, you have effectively created a contingent real estate contract. The sale’s finalization hinges on the inspection results, conforming to the stipulations outlined in the contract.
The Mechanics of a Contingent Offer
A contingent offer serves as a protective shield for the buyer, allowing the opportunity to nullify the contract without any penalty if the stated conditions are not met. If, for example, the offer is contingent upon the home inspection revealing a minimum roof life of 15 years, an unfavorable inspection result could trigger an active contingent status. The seller can then choose to fix the roof, adjust the sales price, or potentially face the buyer pulling out of the contract.
Successfully making a contingent offer on a property becomes more seamless when you’ve already identified your preferred lender. By starting the approval process early, you alleviate the seller’s fears of the deal falling through due to financing issues, thereby increasing the likelihood of the seller accepting your offer, contingencies included.
The Flip Side of Contingencies
Although contingencies offer a safety net for buyers, sellers may favor offers free of contingencies. This is especially true in highly competitive markets where your contingent offer might be less appealing compared to other offers lacking such conditions. For instance, a home sale contingency could deter sellers who prefer not to wait for the sale of your current home. Thus, judicious use of the contingency clause is necessary to ensure your offer remains attractive.
Common Contingencies in Real Estate Transactions
The types of contingencies included in your offer depend on your specific circumstances, market dynamics, and your real estate agent’s advice.
Let’s explore several common contingencies:
Home Inspection Contingency: This allows a home inspector to evaluate the home’s condition, potentially revealing significant flaws not visible to the untrained eye. If issues arise, negotiations can ensue between the buyer and seller regarding who will cover the cost of repairs.
Mortgage Contingency: This contingency provides the buyer with a certain timeframe to secure financing. A crucial step here is to ensure preapproval for a mortgage, rather than just prequalification.
Appraisal Contingency: When obtaining a mortgage, an appraisal is necessary to determine the home’s actual worth. This contingency protects you if the appraised value falls short of the agreed sales price.
Title Contingency: This protects against potential ownership disputes or past encumbrances that could make the purchase risky.
Home Sale Contingency: This contingency stipulates that the sale can only proceed if the buyer’s current home is sold first. It’s important to note that this contingency might not be attractive to sellers in a seller’s market.
House Hunting and Contingencies
Understanding contingencies aids in making informed decisions when placing an offer on an active listing. Despite having your sights set on a specific house, your real estate agent may advise you to keep exploring other options, given the potential for an accepted offer to fall through due to contingency issues.
Contingency with a Kick-Out or No-Kick-Out
Sellers may request a kick-out clause, allowing them to consider other offers with fewer contingencies. However, they are obliged to give you a period to remove the contingencies before accepting another offer. On the flip side, in a buyer’s market, sellers may accept a contingency with a no-kick-out provision, prohibiting them from accepting new offers while contingencies are being addressed.
How Contingencies Protect Buyers
Incorporating contingencies in your offer serves as insurance against unforeseen issues that could arise with the property, potentially voiding the sales contract. This helps safeguard the earnest money deposit, which can be refunded if the contingency criteria are not met.
Contingent Offers: How Often Do They Fall Through?
While contingencies can introduce uncertainty, a survey by the National Association of Realtors found that only 5% of offers fell through. The common culprits for failed deals were job losses among buyers and problems arising from home inspections.
More Information About What is Contingent in Real Estate
Buyers have the liberty to choose the types of contingents they want in their offer. This choice is influenced by their situation, the market dynamics, and the real estate agent’s suggestions.
Here’s a rundown of common contingencies:
Home Inspection Contingency: This allows a home inspector to evaluate the home’s condition. If the inspection uncovers severe issues, the buyer can withdraw, or the buyer and seller can negotiate the repair costs.
Mortgage Contingency: It provides the buyer a certain period to secure financing. This financing contingency can be managed by getting preapproved for a mortgage and conducting due diligence.
Appraisal Contingency: Often used when taking a mortgage, it ensures the asking price corresponds with the home’s value. If the house is appraised for less than the sales price, the buyer can pay the difference or renegotiate the price.
Title Contingency: Ensures the house has a “clean title” without any encumbrances like easement issues or past mortgage liens.
Home Sale Contingency: It stipulates the sale will proceed only if the buyer’s current home sells first. While this protects the buyer, it’s often rejected by sellers in a seller’s market.
Understanding contingencies equips buyers to make more informed offers on active listings. In markets with low housing inventory and surplus buyers, it’s wise to keep considering properties and making offers even when your desired house has an active contingent status.
Sellers might ask for a “kick-out” clause in a contingent contract, allowing them to consider other offers with fewer contingencies. Yet, they can’t dismiss your offer simply because they found a better one. They must inform you and provide a stipulated period to remove the contingencies.
Conversely, in a buyer’s market, sellers might accept a “no-kick-out” contingency, preventing them from entertaining new offers while working through the contingencies.
Including contingencies in a contract protects buyers by allowing them to cancel the sale if problems arise with the property. In such cases, the seller can relist their home, and the buyer retrieves their earnest money deposit.
The risk of a deal falling through due to a contingent offer is relatively low. As per a survey by the National Association of REALTTitle: Contingent in Real Estate: Navigating the Intricacies of Home Buying
Anatomy of a Contingent Offer
In an active real estate market, a prospective buyer might choose to make their offer contingent on various conditions. This decision often hinges on the advice of their real estate agent, the specifics of their financial situation, and the realities of the market at the time. Some common contingencies are the home inspection contingency, financing contingency, appraisal contingency, and home sale contingency.
Each of these contingencies serves to protect the buyer and seller in different ways. For instance, the home inspection contingency allows the buyer to back out if significant issues are discovered during the home inspection. Conversely, a financing contingency ensures that the deal is subject to the buyer securing a mortgage within a certain timeframe.
The appraisal contingency is particularly crucial when the sales price and the home’s actual value might differ. In these cases, a third-party appraisal is conducted to determine the home’s true worth, protecting the buyer from overpaying and the lender from over-financing.
A home sale contingency comes into play when the buyer needs to sell their current home to finance the new one. Although this protects the buyer, it can make the offer less attractive to the seller, who might be accepting backup offers without such contingencies.
In Conclusion: The Significance of Contingencies in Real Estate
In the often tumultuous process of buying a property, contingencies act as a protective shield for both buyers and sellers. They provide a path for both parties to navigate unforeseen issues and keep the transaction fair and balanced. However, it’s crucial for buyers to carefully consider the number and types of contingencies they include in their offer, as they can impact a seller’s willingness to accept it.
Working with a knowledgeable real estate agent and getting pre-approved for a mortgage can help buyers make informed decisions and negotiate effectively. With these preparations, prospective buyers can make contingent offers that not only protect them but also appeal to sellers, increasing the likelihood of a successful home purchase.