What is a Contingent Offer?
There are many different terms in the real estate world, and some of the verbiage can get a little confusing if you are not familiar. One of those terms that you might see is "Contingent Offer." This term can be applied to many areas of real estate, further adding to the confusion. Whether you are looking to sell or searching to buy, it is important to be familiar with different types of contingencies and how they can effect you, along with your decision making.
In general terms, a contingent offer is any offer in real estate that is made that has a condition or that has additional criteria that must be met. If this condition/criteria is not met or satisfied before the sale is complete, then they have the right to legally back out of the deal without any reprecussions. These clauses help protect the buyers in the event something happens that could prevent their loan application from being approved. It also protects the sellers because if any of the conditions aren't met, they can also move on to another offer. Time is money when a house is trying to sell, and the longer it stays on the market, the more it hurts the value of the home.
In all situations, these conditions are laid out in the offer when sent to the seller, and the seller has the right to either accept or deny them with the goal to have it be beneficial for both parties. Any negotiations that happen between a buyer and seller will be written into the final contract. In this article we will help untangle all the different ways this term can be applied throughout real estate.
Home Sale Contingency
A home sale contingency is a situation in which the sellers have accepted a buyer's offer, with this condition: they cannot buy the property that is for sale unless their house sells as well. In simple terms, the buyers are also sellers. Often, this is because the funds that the buyer will be using to purchase will be coming from the sale of their own property. This type of contingency is high risk, and often denied on the seller's end because the sale of their home depends on someone else's.
If a seller does accept a home contingency offer, then one of two things will usually happen: they will remove their property from the market and wait for the buyer to sell their existing home OR they keep their home on the market and allow the buyer the first right of refusal. A first right of refusal is a negotiation between the buyer and seller in which in the event that the seller receives a better offer within a certain timeframe (typically within 72 hours of accepting your offer), the buyer then gets to decide whether or not they would like to still continue with the sale or let the seller accept the other offer. The latter may happen in the event the prospective buyer has not yet received an offer on their own home, and they need the funds from the sale to purchase the home.
An inspection contingency is perhaps one of the more common ones, in which it allows the buyer to pull out if there is ultimately a deal breaker that appears during an inspection. For those that don't know, a home inspection is when a licensed professional goes over the inside and outside of the home with a fine tooth comb, giving a very detailed report about the status from everything to electrical to vegetation. If, for example, the home has major leaks or rot, or has some other costly expense that the buyers don't want to deal with or can't negotiate with the sellers about, then this contingency allows them to withdraw their offer and forces the seller to choose another.
A title contingency protects the buyers in a situation in which the seller is fraudulent. This can happen if the seller has title or lien issues on their end, whereas they do not have clear possession of the property. This can sometimes happen with inheritance, or if a home is about to go under foreclosure.
We all know this one; when a property is for sale we pay close attention to the $ sign. How much is it going for? Can you afford it? Do you offer above or below, or right at the asking price? In times of high demand, home prices may be overly inflated, but it often backfires do to the appraisal. An appraisal is the TRUE worth of the home, based on square footage, condition, location, ect. If a professional appraiser comes and deems the home's value is worth significantly lower than your offer price, this type of contingency allows the buyer to pull out if they can not get the seller to negotiate a lower sale price. In order to be successful, the appraiser's value should be either equal or above your offer price. If this contingency is not written into your contract, then you may be stuck with paying a higher price knowing the true value of the home is much lower.
Unless a buyer is paying cash for a home, they will need to get prequalified for a loan. There are many factors that go into this consideration, a major factor being where a buyer's income comes from. If any financials change once a buyer has gone under contract, that can put a big kink in the process. That is why it is advised not to go and make any major purchases such as a car, or change jobs as a prospective buyer. If a buyer's financials change to such a degree they can no longer afford to purchase the home and secure a loan, they may still be subject to following through because they are locked in a contract. If they have a financial contingency, however, a buyer isn't legally obligated to complete the sale and protect themselves by pulling out of the deal.
Read the Fine Print
Whether you are a buyer or a seller, it is vital that you understand what you are agreeing to with a contingent offer. They can be complex, and detailed, and often there can be more than one contingency within a contract. Buying and selling property is a huge investment on both ends and an experienced real estate agent can help guide you the process and make sure that you not only are getting the best deal possible, but that nothing is missed.