What Does Contingent Mean in Real Estate? A Detailed Explanation

Till February 2024, 4.38 million units of existing homes were sold. There was an increase of 9.5% in overall sales. However, the uncertainty in home sales persists in the real estate housing market.

Contingent home transactions can protect your interests as a buyer. They are dependent on the fulfillment of certain conditions. Buyers can back out if the transaction does not proceed as planned.

What Does Contingent Mean in Real Estate?

Real estate contingent refers to the status of a home sale in which either party makes an offer and it is accepted but certain conditions must be met before the deal happens. There are two possible scenarios.

1. The buyer makes an offer and the seller accepts it. However, the seller chooses to keep the listing active on housing websites till all the conditions of the sale are met.
2. In another case, the buyer accepts the price listed by the seller. But they keep a condition that the home inspection report should be clean. Only then the deal will take place.

Both these scenarios are examples of contingent offers. They depend on certain conditions to be fulfilled.  Contingencies protect the interests of both parties but they are mainly for home buyers’ benefit.

How Do Contingencies in Real Estate Work?

If you have shortlisted a house and want to make an offer, adding some contingencies can ensure a good deal. Here’s how you can proceed:

• Select Contingencies: There are different contingencies related to appraisal, inspection, title, etc. Select wisely because adding too many contingencies can put off the seller. Consult an agent before making a contingent offer.
• Make an Offer: The next step is to make an offer to the seller directly or through an agent. Make sure you specify your conditions to the seller. Also, explain how you plan to finance your purchase and whether you have a property to sell first.
• Draw Up a Contract: If the seller accepts your offer, you can draw up an agreement. The listing status will change to active contingent. The conditions have to be met within the time specified in the real estate contingency contract.  
• Fulfill of Contingencies: As per the contingencies mentioned in the agreement, the property appraisal and inspection would take place. You need to verify whether the disclosures and valuation given by the seller are accurate.
• Close the Deal: After the conditions are satisfied, you can go ahead with the closing process and make the payment as decided. The title transfer takes place and you become the property owner on the date mentioned in the contract.

This is how contingency on a house works for home purchases. The seller can also place contingencies in the contract related to new housing and mortgage approval. If either party is unable to meet these contingencies, the contract may fall through.

Types Of Contingencies In Real Estate

As a home buyer, you have several contingencies at your disposal to include in the purchase agreement. Some of the common ones are listed below:

1. Home Sale Contingency

This contingency states that the deal will only happen if you can sell your current home first. It gives you time to be financially ready to purchase a new property.

However, you can buy a house without this contingency if you have access to alternative financing options. Be aware that in a seller’s market, the seller may reject your offer for a non-contingent one.

2. Home Appraisal Contingency

To ensure that the seller’s property valuation is as per the market conditions, you can place a home appraisal contingency. This is necessary when you are taking out a mortgage.

The lender will give you a loan as per the actual worth of the property. You can negotiate if the seller asks for a price greater than the appraised value or back out if they do not agree.

3. Home Inspection Contingency

This real estate contingency allows you to assess all the aspects of a property before purchase. You can verify the disclosures made by the seller.

If the home inspection report reveals some major issues with the property, you can negotiate with the seller regarding repairs. However, if there is a lack of transparency, you can back out of the deal.

4. Mortgage Contingency

You need to secure home finance before purchasing a property. A mortgage contingency can buy you time for that. The deal will only take place if you can finance it with a mortgage.

To make sure you fulfill this contingency, take some time to complete the mortgage pre-approval paperwork. This can bring you closer to mortgage approval. Also, take care of your credit score and avoid financial issues.

5. Title Contingency

This is a very important contingency that you should always include in your purchase agreement. The title deed of the home specifies the actual owner of the property.

If there are title disputes like mortgage lien and easement issues related to the home you want to buy, you can face legal issues. To get protection from future claims, use a title contingency.

6. New Housing Contingency

The seller can put in this contingency to back out in case they are unable to secure a new home before the specified date. The seller can accept your offer even before they find their next home. However, this contingency makes the deal uncertain.

Contingency Status

A contingent listing status can mean several things. As a home buyer, when you search for ‘real estate for sale near me’, you will come across some listings with ‘status contingent’.

You should check the subcategory of the contingency status before making an offer.

1. Contingent Continue To Show (CCS)

This status means that the seller has accepted an offer but kept the listing active to show the property to more buyers. This generally happens when there are multiple contingencies and the contract is likely to fall through.

2. Contingent: No-Show

When an offer has few contingencies and the seller is confident of closure, they select this status. It means that they have accepted an offer and are not willing to show the house any further.

3. Contingent: With Kick-Out

The seller sets a deadline in the contingent real estate contract for the buyer to meet certain conditions. In the meantime, they continue to show the house to other buyers. They can kick out the first buyer if they receive a good no contingency offer.

4. Contingent: Without Kick-Out

When the seller opts for this listing status, it means that there is no deadline for the buyer to meet contingencies. Even if the seller receives a better offer, they can’t kick out the buyer.

5. Short Sale Contingent

The seller and their mortgage lender may accept an amount lower than the listing price to recover the remaining mortgage amount. The listing status becomes short sale contingent. The house is no longer on sale and the seller has accepted an offer.

6. Contingent Probate

This status is commonly used for properties that are sold after the death of the owner. It means that the lawyer will receive a portion of the sale value for completing the process on behalf of the owner.

Pros and Cons of Contingencies in Real Estate

Contingencies can protect home buyers and sellers. However, they can also make real estate transactions more complicated and uncertain. The pros and cons of contingencies should be weighed carefully before including them in the contract.

Pros

• Protect buyers by allowing them to back out of the contract without losing the earnest money deposit
• Give buyers more time to secure financing, inspect the property, or sell their current house
• Allows buyers to negotiate repairs or price reductions based on inspection results
• Prevent buyers from purchasing a property with defects or issues

Cons

• Make an offer less attractive to sellers, especially in a competitive market
• Decrease the chances of securing a deal in a multi-offer situation
• Increase the cost of the transaction as the buyer is not reimbursed for inspection and appraisal costs
• Make the purchase contract less secure and potentially delay the closing

How Can a Contingency Protect Buyers?

Contingencies in the purchase agreement can protect buyers from potential financial or legal risks before the sale closes. Buyers get a way out of a problematic sale.

For example, a mortgage contingency allows buyers to back out of a sale if they are unable to secure financing. They get back their earnest money deposit.

A home inspection contingency allows a buyer to back out without legal implications if the inspection report shows significant issues.

How Often Do Contingent Offers Fall Through?

According to a survey by NAR, 6% of purchase contracts were terminated in the last 3 months. There can be various reasons for termination- inspection, appraisal, mortgage, etc.

However, a buyer or seller can only back out if a contingency is in place. So, the figures for contract termination also reflect the number of contingent home offers that fell through.

How Long Does a House Stay in Contingent Status?

Generally, a house stays in contingent status for 30-60 days. In some cases, the contingency period stretches to 90 days. The purchase agreement mentions the timeline and the seller or buyer needs to fulfill the conditions within the stipulated time. The deal is closed after that.

Is It Ever a Good Idea to Waive Contingencies?

The contingency clause should be used judiciously. Home sellers prefer lesser or no contingencies but buyers need to protect their interests. Waiving contingencies work for cash offers because there is no question of a mortgage. Even then, title contingency should not be skipped.

For mortgage-based offers, having appraisal, inspection, and financing contingencies can give the buyer an escape clause and protect them from penalties. Whether it is a seller’s market with multiple offers for the same property or a buyer’s market, you should consult a professional before waiving contingencies.