You may have heard your friends talk about contingencies when purchasing their home or you may see the word contingent attached to a listing. What does contingent mean when buying a house and how do contingencies work in the home purchase process?
Real estate is full of its own jargon, so you may frequently hear a term used without knowing exactly what it means. This is true of the words contingent or contingency— terms that apply to a number of aspects of the real estate transaction.
What Does Contingent Mean In Real Estate?
Literally, the word contingent simply means that something is subject to the satisfaction or completion of some requirement. In other words, the thing that is contingent is dependent on something else happening.
In real estate, the word is used to mean that a transaction is dependent on some factor or combination of factors. Sometimes the contingency is small and easy to satisfy, like a home inspection which can generally be completed in a day or two.
Other times, the contingency takes longer but is still likely to be completed. This is the case for a financing contingency, for example, where the buyer has been pre-approved for a loan but needs to complete the lender’s underwriting process.
In still other cases, however, there may be more serious contingencies that need to be satisfied, like the sale of an existing home or the purchase of a new home by the sellers. These can take many months to complete after your offer is accepted and can cause extensive delays to the transaction closing process.
How Does A Contingent Offer Work?
A contingent offer can be applied on behalf of either the buyer or the seller. Contingencies may be a matter of personal preference while certain contingencies may be required by the lender. Contingencies are negotiated during the initial offer and may have a variety of restrictions and conditions attached to them.
As a buyer, you are required to put down a deposit, called an earnest money deposit or EMD, along with your initial offer. If for some reason the transaction is not completed due to a decision on your part, the sellers would, in many cases, be entitled to keep your EMD. Since an EMD can sometimes be as much as 3-5% of the purchase price of the home, the loss is an expensive one.
By making a contingent offer, you can put certain benchmarks in place that allow you to make further decisions based on new information. For example, a home inspection contingency may allow you to walk away without giving up your EMD in the event of a bad inspection report.
In some cases, a contingent offer results in the home being removed as an active listing. In other cases, a listing will remain available for showing and for other offers, including offers without contingencies.
A contingent offer may define the terms of its completion upfront or may require further negotiations. For example, a home inspection contingency usually means simply that the buyer has a right to an inspection. In most cases, it does not outline specific terms of what an acceptable inspection would look like or what further negotiation might occur depending on the results of the inspection.
What Are Common Contingencies In Real Estate?
There are many common contingencies in real estate, including the following:
- Home inspection contingency: This is perhaps the most common contingency that you will see on a home purchase. It sets out a specific amount of time for a home inspection to be scheduled and completed. It may be accompanied by related contingencies like a radon contingency or termite inspection contingency, sometimes referred to as a wood destroying insect inspection.
In addition to an overall home inspection, you may see specific inspections mentioned. For example, if a buyer is making an offer on a home with a pool, they may ask for a specific inspection on that element from a qualified pool inspector. Similarly, buyers may ask for a specialized inspection of elements like chimneys, roofs, and foundations.
In a multiple offer situation, a buyer may be looking to minimize contingencies in order to put together a more competitive offer. In this case, they may ask for an information-only home inspection, allowing them to gather information about the home’s condition while reassuring the seller that they won’t be requesting repairs or a price reduction based on the report.
A home inspection contingency is generally removed once the buyer has received a satisfactory inspection report. On the other hand, it may be subject to further negotiation after the report has been provided if needed repairs are identified.
The sellers may choose to change the sale price or offer funds at closing to cover the cost of needed repairs. Alternatively, they may choose to make the repairs themselves and provide proof prior to the closing. Finally, the sellers may choose to make no repairs and offer no money, leaving it up to the buyer to decide whether to proceed with the transaction.
- Financing contingency: A financing contingency may also be referred to as a mortgage or funding contingency. This type of contingency gives the buyer time to proceed through the underwriting process for a mortgage loan and secure final approval before being required to finalize the purchase of the property. This protects the buyer in the event that their financing does not go through or that their financial situation changes during the escrow process.
In most cases where an offer is accompanied by a pre-approval from a reliable lender, the financing contingency is something of a formality since the lender has already indicated that they are willing to finance the purchase. In many markets, the financing contingency lasts for a minimum span of time, often 21 days, to give the lender time to complete the underwriting process.
The lack of a financing contingency is one reason that many sellers look more favorably on cash purchases since they do not require the lengthy underwriting process. This can be important when sellers are looking for a quick turnaround on the escrow process for their sale.
- Appraisal contingency: An appraisal contingency ensures that a buyer is able to walk away from a purchase if the property does not appraise for the purchase price. A home appraisal is usually required in cases where a lender is financing the purchase. Should the appraisal “come in low” or under the agreed upon price, an appraisal contingency allows the buyer to appeal the appraisal, walk away from the transaction, renegotiate with the seller, or offset the difference in price by adding additional funds of their own.
- Title contingency: A title contingency may be added to protect the buyer in case there is a question of ownership, also referred to as a “cloud on the title,” or a pre-existing lien against the property. Generally, these issues will be identified during the title search prior to the closing of the property. Some buyers may choose to purchase title insurance to protect themselves should title problems or ownership disputes occur after closing.
- Home sale contingency: In some cases, a buyer will identify a home for purchase before selling his or her current home. They may then wish to add a home sale contingency, stipulating that they will purchase the property once their current home has sold.
In some markets where there is high buyer demand, a home sale contingency may be difficult to negotiate. In these cases, buyers may choose to implement a bridge loan or other alternative financing strategy or the sellers may choose to continue showing the home until the buyers have their home under contract.
What Does A Contingency Mean When House Hunting?
When you are looking for a home, a contingency offers you a measure of protection against unforeseen circumstances or problems with the property itself. In multiple-offer scenarios, you may feel a tremendous amount of pressure to forgo contingencies in order to bring a more competitive offer to the table. However, this could have disastrous financial consequences if you subsequently become aware of problems with the property or the transaction.
By having a plan in place and understanding the amount of risk tolerance you bring to the transaction, you and your real estate agent can craft a contingency plan that makes sense for you.
Contingent With A Kick-Out
In some cases, sellers may accept a contingent offer but reserve the right to continue showing the home and fielding other offers while waiting for your contingencies to be satisfied. This “kick-out” clause provides added reassurance to the sellers that you will either perform as contracted or that they can find someone else who will.
Even with a kick-out clause, however, the sellers cannot arbitrarily accept another offer and leave you high and dry. They must give you the opportunity to meet the terms of the other offer and give you a chance to remove the contingencies and proceed with your purchase.
Contingent With No-Kick-Out
In other cases, sellers may accept a contingent offer with no kick-out clause. This gives you added peace of mind since it means that the sellers will allow you to move through the process with your contingencies in place without worrying about new offers changing the terms of the transaction.
Be aware that some sellers will be resistant to contingencies, especially if there is high demand in their market or if you are negotiating against multiple other offers. It is important to ensure that you do only what you are comfortable with and that you understand the risks involved before dropping a contingency.
What's The Difference Between Contingent And Pending?
When a home’s status is shown as contingent on the multiple listing service (MLS), an offer has been accepted by the seller but there is at least one contingency attached to the offer. This may mean that the seller is continuing to entertain other offers or it may mean that they are simply waiting for the contingencies to be addressed and settled.
Once the contingencies have been satisfied, the contract moves to pending status. This means that the seller and buyer have committed to moving forward with the transaction and are working their way through the escrow process. Usually, this is the time period during which the closing attorney or title company is completing all of the paperwork for the transaction and scheduling a closing date for the various parties.
Some MLSs do not have a contingent status. They may show pending status even for transactions where there are contingencies if the contingencies themselves are likely to be satisfied. They may show active status if they are still entertaining offers, even if there is a contingent offer in place. Talk to your real estate broker or first time home buyer real estate agent about the status most commonly used in your local MLS if you have any questions.
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