What Does Contingent Mean in Real Estate?
When you browse through listings on sites, you may have noticed some properties labeled as “contingent.”
Does this mean that the house isn’t up for offers any more, or does this indicate that the property is reserved for a certain buyer?
A property listed as contingent comes with terms and conditions that are stated in the contract, mainly to let the buyer opt out of a deal without having to lose their earnest money deposit.
However, there are only certain instances that can be given a contingency. Knowing what contingencies are involved in a home sale will help you find just the right property.
What Does Contingent Mean in Real Estate?
In the real estate market, properties are marked differently before they are sold to a prospective buyer. One of these is “contingency.”
“Contingent” literally means “subject to change,” which is similar to its meaning in the real estate market.
When a house is marked as “contingent,” the home’s owner has already accepted an offer from a potential buyer that comes with contingencies.
Contingencies refer to the conditions written in the contract that either the buyer or the seller must meet before they go through with the sale, usually within a given period of time.
Here are a few examples:
Although a buyer places an offer on a home, the offer remains contingent because they will need to obtain a mortgage first.
The buyer gets the property inspected to ensure that it is in good condition and shape or true to the way the seller had described it to be.
What Is the Difference Between Contingent and Pending in Real Estate?
Marking a property as contingent means that the home is already under a contract with a buyer. Usually, this comes with specific contingencies stated in the contract, which should be met within a certain period of time before the transaction moves forward.
However, the listings for the property remain active because of the possibility that the contract may fall through.
When all the terms are met, the deal will be marked from contingent to pending.
A pending property refers to a home that has been accepted under a contract and all contingencies have been cleared out.
When the listing is pending, they will no longer be listed as active. It stays in this status until all of the legal papers and work have been processed successfully.
What Items Can Be Contingent on a House for Sale?
Before a property gets sold off, it will usually have to go through inspections and other processes to make sure the transaction goes smoothly.
Because of the different factors that affect how well the sale goes, various contingencies are applied.
Having contingencies in the contract will protect both the seller and buyer from a failed deal.
The factors of the property that can get contingencies are the following:
- Buyer’s mortgage approval
- Property’s appraisal
- Inspection of the property
- Buyer’s ability to sell off another home
- The property’s title
- Offers the seller receives while the property is contingent
These cause changes in the contract, which will allow either party to negotiate the terms, comply with the new conditions, or terminate the contract.
Mortgage or Financial Contingency
A financial contingency comes up when the potential buyer is unable to get the money needed to purchase the property or if their mortgage falls through.
For example, if the agreement specifies that there should be a 30% down payment and a conventional loan of 30 years, then this is what the lender will be considering. If the buyer fails to get the mortgage, the situation allows the seller to back out of the sale.
Usually, sellers check the buyer’s financial qualifications to determine if they have the ability to purchase the home. This part is important if the buyer needs to get a mortgage.
By having a mortgage or financial contingency, the seller can protect themselves from a failed transaction without having to waste too much time and other potential buyers.
When the property is appraised, the value of the home must be enough to justify the given offer.
A buyer’s agent will usually put appraisal contingencies on the contract to make sure that their client isn’t overpaying for the home.
In the event that the offer for the property doesn’t match up with the appraised value, the buyer will be given the choice to negotiate for a lower price or back out of the deal.
However, it’s important to make sure there aren’t any appraisal disputes wherein the appraiser has lapses in calculating the value of the said property.
Before the home gets sold off to a prospective buyer, the property goes through an inspection.
If the result of the inspection states that there are several issues with the home such as problems with structure, plumbing, roofing, and other significant problems, the buyer can place a contingency to get those issues fixed. They can also negotiate with the seller for a lower price.
If the seller refuses to get the property fixed up or the price of the home isn’t lowered, then the buyer can choose to step out of the deal.
Failing to comply with any of the terms given by the buyer after finding major wear and tear in the property would be similar to terminating their agreement.
Sale of Another House Contingency
The scenario may come up wherein the buyer can only get the money to purchase the property after they have sold off their current home.
It’s typically easier to sell a home before moving on to buy a new one. However, the financing isn’t always timed perfectly.
By putting a home sale contingency, the buyer will be given a certain period of time to sell off their existing home and finance for their new potential house.
This contingency protects the buyer in the event that their existing home fails to get sold within the time they are given since this would only lead to the termination of the contract or the choice to back out of the transaction.
Although, some sellers refuse to accept a home sale contingency because it often leads to failure on the part of the seller. Often, they only accept this if they are confident they could get another offer on the property within a short time after they put the house back up for sale.
Having a title contingency allows the buyer to back out if they are in doubt of the ownership status of the property, which can be proved by title searching.
This gives the buyer the ability to review any agreements that are available in public records to ensure that the person they’ll be buying the property from has the home’s title.
Real estate attorneys usually recommend their clients purchase title insurance along with the property.
Putting this in the contract doesn’t necessarily mean you will be purchasing the property with a clear title. It simply means that you’re still uncomfortable with the records you’ve seen and would like to justify how true it is.
The title of the property, can be problematic if the true owner is not the one buying the property. The true owner may take the title back as a Quiet Title which can also play into the contingency.
If a property is listed with an active contingency, it means that the seller has accepted an offer from a potential buyer. Therefore, the property is already under a contract.
However, the offer they accepted comes with specified contingencies that either the buyer or seller still has to meet.
The sale will only push through if all the requirements stated in the agreement are met. If not, the buyer or seller will have the choice to opt out of the deal according to the failed contingency.
This is also applicable if changes occur that may affect the agreement.
For example, if another buyer makes a better offer for the property while it’s under a contract. This contingency is often called “right of first refusal,” and it allows the seller to opt out of the deal if the current buyer cannot match up with the higher offer.
Can You Put an Offer on a House That Is Contingent?
If you’re house shopping, you may encounter a few homes listed as contingent. Although this marks the home as “taken,” it doesn’t make it exclusive to the current buyer unless the seller refuses other offers.
Even when a property is listed as contingent, you can still make an offer for it. This is applicable until the property’s status is “sold.”
Some contingent offers can fall through. By putting in a backup offer for the property, you give the seller the option to move to you if their current deal doesn’t work out.
You may have to pay an earnest money deposit and option fee. However, you get that money back if the contract doesn’t push through.
If you happen to put in an offer during the early contingent stages, depending on the contingencies set in the seller and buyer’s contract, the seller may be able to accept a better offer.
This will usually go into effect if the buyer fails to match up with the other offer.
How to Buy Homes That Have a Contingency on It
The best way to purchase the home you want is by looking into them as earlier as you can before they get marked as pending.
Although, there are a few ways to get a property even when it’s listed as contingent.
Talk to the Listing Agent
Get in touch with the listing agent to get the necessary details about the contract the property is under.
Ask them what inspections have been done, how the buyer and seller are feeling about the agreement, and whether or not the contract entertains backup offers from others.
These details will help you identify what you should adjust to be able to get ahold of the property.
Put Up a Strong Offer
When you make your backup offer, try to waive some contingencies.
This is risky and could potentially be less beneficial on your part as the buyer, so make sure you’re putting up this offer for a property you really want.
Sellers are more attracted to offers without contingencies. If your offer consists of little to no contingencies, the current buyer may get pressured to drop their contingencies or simply back out of the deal.
Write a Letter
You can also write a personal letter to the current homeowners.
Not everything about the dynamics of a home sale can be revealed by the listing agent, especially to a third-party person. It may even be possible the homeowners aren’t quite happy with the current offer they’re taking on.
By getting in touch with the homeowners directly, you can send them an offer through your letter that may give you an advantage against the current buyer.
Writing a letter to the seller regarding your offer is another option. You can elaborate your offer to them so that they can review and compare it to the current contract, allowing them to identify which offer gives them better benefits.
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