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11 min read May 17, 2023

Contingent in Real Estate: A Double-Edged Sword

Contingent

Are you looking for a new house? Then you must know what contingent is in real estate. A contingent condition in real estate denotes that the transaction has not yet closed.

In this blog post, we’ll define “contingent” in the context of real estate and explain its importance in the purchasing and selling process. Understanding contingencies can help you confidently negotiate the real estate market, whether you’re a buyer or a seller.

Key Takeaways

  • Contingent in Real Estate: A condition or provision that must be satisfied before a sale is a contingency in real estate.
  • Contingent Offer: Contingencies in a purchase agreement protect buyers from unexpected expenses and issues. However, they must meet within a specified timeframe to avoid losing the deposit and the sale falling through.
  • Contingency in House Hunting: Contingencies in a purchase agreement protect buyers from unexpected expenses and issues. However, they must meet within a specified timeframe to avoid losing the deposit and the sale falling through.
  • Contingencies in the Home Buying Process: It is vital to consider which contingencies are necessary and to work with a qualified real estate agent or attorney to ensure that the purchase agreement is fair and meets the buyer’s needs.
  • Success Rate of Contingent Offers: By understanding the success rate and factors that can impact the success of contingent offers, buyers can take steps to increase their chances of a successful transaction.

What Does Contingent Mean in Real Estate?

The term “contingent” in real estate means that the sale of a property is not yet complete but is pending on certain conditions. As a result, even if both parties agree on the terms of the sale, it may still fall through.

Types of Contingencies in Real Estate

There are various types of contingencies in a real estate contract. Some of the most common ones include:

  • Inspection Contingency: This allows the buyer to have the property inspected before the sale becomes final.
  • Financing Contingency: This allows the buyer to withdraw from the sale if they cannot obtain financing.
  • Appraisal Contingency: This allows the buyer to back out of the sale if the property appraises for less than the agreed-upon sale price.

Importance of Contingencies

Contingencies are essential because they protect both the buyer and seller from unforeseen circumstances. They also allow the buyer to withdraw from the sale if certain conditions fail without penalty. 

Additionally, contingencies can help prevent future legal issues from arising in the sale due to unforeseen circumstances. Understanding what contingent means in real estate is essential for buyers and sellers alike. 

Contingencies provide an extra layer of protection during the sale process and can help prevent legal issues from arising. Therefore, all real estate contracts should include the appropriate contingencies to protect your interests.

How Does a Contingent Offer Work?

If you intend to buy a house, you might come across the term “contingent offer.” In real estate transactions, contingent offers can protect both buyers and sellers. 

Here’s what you need to know about how a contingent offer works.

Process of Making a Contingent Offer

A contingent offer is an offer to buy a house dependent on certain conditions. Usually, these conditions relate to financing, inspections, or selling another property. 

To make a contingent offer, you must work with a real estate agent who can help you navigate the process.

Conditions of a Contingent Offer

The conditions of a contingent offer appear in the purchase agreement. For example, if your offer is contingent on financing, you should include a financing contingency in the purchase agreement. 

This contingency allows you to back out of the deal if you fail to secure financing. Other common contingencies include home appraisals, inspections, and selling another property.

Risks and Benefits of a Contingent Offer

While a contingent offer can help protect you as a buyer, it also comes with risks. For example, if the seller receives another bid without contingencies, they may be more likely to accept that offer over yours. 

Additionally, if the contingency fails to meet within the agreed-upon timeframe, the seller may have the right to withdraw from the deal. On the other hand, a contingent offer can give you more time to secure financing or sell your current home. 

It can also protect you from purchasing a home with significant issues you weren’t aware of. Understand the risks and conditions of a contingent offer before making one. Working with an experienced real estate agent can help you determine whether a contingent offer is right for you.

Conditions of a Contingent Offer

When making a contingent offer on a real estate property, certain conditions are required to go through. These conditions, or contingencies, protect the buyer and allow them to back out of the deal. 

Here are some common conditions of a contingent offer:

  • Financing Contingency: This condition ensures that a buyer can obtain financing to purchase the property. It allows the buyer to withdraw the sale if they cannot secure a loan within the given timeframe.
  • Home Inspection Contingency: This condition allows the buyer to have the property inspected by a professional to ensure its condition. Therefore, they can request repairs or back out of the purchase.
  • Appraisal Contingency: It ensures the property appraises at or above the purchase price. If the appraisal is lower than the purchase price, the buyer can back out of the sale or renegotiate the purchase price.
  • Sale Contingency: This condition allows the buyer to back out of the sale if they fail to sell their current property within a specific timeframe.
  • Title Contingency: This condition protects property from liens and other claims against it. A buyer can cancel the purchase if any issues arise during the title search.

What Does a Contingency Mean When House Hunting?

When you’re house hunting, it’s crucial to understand the role of contingencies in the home-buying process. Finalizing the sale depends on the fulfillment of conditions. Here are some key points to keep in mind when considering contingencies:

Understanding the Role of Contingencies

Contingencies are a crucial part of the home-buying process. In addition to protecting buyers, they ensure a fair transaction for both parties. Contingencies can cover a variety of issues, including:

Factors to Consider When Including Contingencies

When you’re putting together a purchase agreement, it’s vital to consider the contingencies that you want to include. Here are some factors to keep in mind:

  • Prioritize your contingencies based on what’s most important to you.
  • Be realistic about the contingencies you include. Some contingencies may make it difficult to close the deal, so be sure to weigh the potential benefits against the risks.
  • Consult your real estate agent about local contingencies.

Impact of Contingencies on the Home Buying Process

While contingencies are vital, they can also impact home buying in several ways. Here are some potential consequences to consider:

  • Contingencies can delay the closing process. If a contingency fails to meet, the sale may get postponed while the issue resolves.
  • Sellers may be less likely to accept offers with multiple contingencies.
  • Adding contingencies to an offer can make it more attractive, but the risk is involved. Be sure to carefully consider the potential consequences before making this decision.

How Does Including a Contingency Protect Buyers?

When purchasing a home, including contingencies in the purchase agreement can provide buyers with important protections. It is possible to use contingencies to protect the buyer from potential financial or legal risks before the sale closes.

Here are some benefits of including contingencies in a purchase agreement:

Benefits of Including Contingencies

  • Protection Against Financial Risks:  It allows the buyer to back out of the sale if they fail to secure financing. If the buyer cannot obtain a mortgage, they will not lose their earnest money deposit.
  • Protection Against Legal Risks: This allows the buyer to back out of the sale if significant issues arise during the inspection. It can protect the buyer from purchasing a home with costly and unexpected repairs.

Ways Contingencies Can Protect Buyers

  • Providing a way out of the Sale: Contingencies offer buyers a way out of the sale if certain conditions cannot be satisfied. Buyers can back out of the sale without penalty or financial loss.
  • Reducing Financial Risks: Contingencies can reduce financial risks by allowing buyers to back out of the sale if they cannot secure financing, if the appraisal is too low, or if significant issues arise during the inspection.

Potential Risks of Not Including Contingencies

  • Financial Loss: Without contingencies, buyers can risk losing their earnest money deposit if they cannot complete the sale.
  • Legal Risks: Buyers may be at risk of purchasing a home with costly and unexpected repairs if they do not include a home inspection contingency.

The Success Rate of Contingent Offers

Contingent offers are common in real estate transactions and involve certain conditions that must exist before closing. However, these conditions may not always exist, resulting in a failed contingent offer. 

Statistics on the Success Rate of Contingent Offers

According to a study by the National Association of Realtors, about 76% of homes sold in 2020 were contingent on the buyer’s ability to sell their home. However, the success rate of contingent offers can vary depending on market conditions and other factors.

Factors Impacting the Success Rate of Contingent Offers

  • Market Conditions: In a seller’s market with high demand and low inventory, sellers may be less likely to accept a contingent offer.
  • The Strength of the Buyer’s Offer: An offer with a high down payment and pre-approval letter may increase the chances of a successful contingent offer.
  • The Nature of the Contingency: Some contingencies, such as a home inspection or financing contingency, are more likely to be met than others.
  • The Seller’s Motivation: A motivated seller to sell their property may be more likely to accept a contingent offer.

Strategies for a Successful Contingent Offer

  • Work with an experienced real estate agent who can help you craft a secure offer and negotiate on your behalf.
  • You may want to include an appraisal contingency to protect yourself if the home appraises for less than the sale price.
  • Consider offering a higher down payment or earnest money deposit to show the seller your commitment to the sale.
  • Know the risks involved in waiving certain contingencies if you are confident you can meet them.

Pros and Cons of Contingencies in Real Estate

Real estate transactions often include contingencies. They can provide buyers with protection. However, they can also make the process more complicated and uncertain.

Here are some pros and cons of contingencies in real estate:

Pros

  • Protects buyers by allowing them to back out of the contract under certain circumstances without losing their earnest money deposit
  • Contingencies 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
  • They help prevent buyers from purchasing a property with defects or issues

Cons

  • Can make an offer less attractive to sellers, especially in a competitive market
  • Contingencies add complexity and time to the transaction process
  • They may limit the pool of potential buyers for the property
  • Contingencies can make the purchase contract less secure and potentially delay a closing

Buyers and sellers must carefully assess the benefits and drawbacks of contingencies before incorporating them into a real estate deal. It may be necessary to consult with a real estate agent or attorney to make an informed decision.

Conclusion

Understanding contingencies is crucial when buying a home. Contingencies can help protect buyers and ensure a good deal. But, including contingencies can also have potential risks and drawbacks.

These include a longer closing process or a lower chance in a competitive market. It’s vital to carefully weigh the pros and cons of contingencies and work with a knowledgeable real estate agent. It can increase the chances of a successful and stress-free home-buying experience.

FAQs

Which is more favorable, being contingent or pending?

With a pending offer, all the contingencies have been met, and the sale is in the final stages. However, a contingent offer means that certain conditions must be met before the sale can go through.

Is it possible for a seller to cancel a contingent offer?

Yes, a seller can cancel a contingent offer if the buyer doesn't meet the specified conditions within the agreed-upon timeframe.

Is it possible to accept more than one contingent offer?

No, a property cannot be under contract with two different buyers at the same time, even if the offers are contingent on different conditions.

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