Contingencies in Real Estate: Everything You Need To Know
If you're looking to purchase a home, you've probably spent much time looking at listings. In your search, you might find homes designated as "contingent." Does that mean that they're no longer for sale? Learn more about contingent listings, and whether it's a good idea to get your hopes up about the properties.
Contingency clauses allow for one or both parties to not push through with a real estate contract if certain specific conditions aren't met. In other words, the sale is contingent upon the fulfillment of these conditions. An appraisal contingency, inspection contingency, sale contingency, or funding contingency are the common contingencies in real estate.
What does contingent mean in real estate?
In the real estate industry, the term "contingency" is a clause in a purchase agreement defining the action or condition that must be fulfilled in order for the contract to become legally binding. Both parties, the buyer and the seller, must accept the terms of each contingency and sign the contract before it becomes legally binding. In the real estate industry, the term "contingency" is a clause in a purchase agreement defining the action or condition that must be fulfilled in order for the contract to become legally binding.
Both parties, the buyer and the seller, must accept the terms of each contingency and sign the contract before it becomes legally binding. According to Carlos Del Rio, a real estate attorney from Chicago, contingency clauses protect buyers and sellers by providing them the right to withdraw from a contract if their terms aren't met.
Real estate contingent should not be confused with "contingent listing"
The terms contingent listing and contingencies are often confused with each other. However, they're not the same thing. A contingency listing refers to an on-the-market home listing that is under contract but not officially purchased. An offer has been made and accepted, but before the property is able to reach the point of sale, some requirements, or contingencies still have to be fulfilled.
How Does A Contingent Offer Work?
In a contingent offer , you've stated that a specific condition must be met before the sale can proceed. If it does not, the contract will be null and void, and the seller may proceed to a different offer that got accepted while the sale was contingent. Contingencies are often used to shield the buyer from troublesome listings on the market or other unexpected problems in the real estate transaction.
Let’s take this as an example. We based the offer on a home inspection showing that the roof has a lifespan of 15 years. If the inspector finds the roof's lifespan to be less than seven years remaining, a contingency status will be placed on the property. The homeowner may decide to repair the roof or adjust the price. Alternatively, potential buyers might choose to exit the contract. They could do without penalty because they already had a contingency in place.
6 common contingencies
Here are a few of the most commonly used contingency clauses that can be added to a real estate contract:
- Mortgage contingency
The mortgage contingency clause specifies a window of time that the buyer has to secure financing for the purchase of the house. If the buyer fails to obtain the loan within that time, the buyer can withdraw from the transaction without penalty, and the seller can put their house on the market again and choose a new buyer.
- Title contingency
According to Allen Popowitz, chair of the real estate department at Brach Eichler law firm in New Jersey, title contingency provides the buyer the right to obtain a title search and raise any objections to the status of the title to the property, which must be cleared by the seller for the buyer to close on the transfer of title.
- Home inspection contingency
This clause outlines the period the buyer must get the house they are planning to purchase professionally inspected. A home inspection can help make sure there aren't any serious problems, like leaky roofs, malfunctioning electrical systems, or structural defects. If it turns out the property has defects, and the seller refuses to repair or remediate the issues which are raised by the buyer, the buyer is allowed to terminate the contract, Allan Popowitz states.
- The sale of a prior home contingency
This is to protect buyers who need the cash proceeds from selling their existing property to afford the purchase of a new house. Michael Noker, a Realtor with Realty One of New Mexico in Albuquerque, states that if the buyer needs to sell their current houses within the deadline indicated in the real estate contract but cannot find a buyer, they can escape the contract.
- Appraisal contingency
Appraisal contingencies protect buyers by stipulating that the property should appraise at the specified selling price, at a minimum, or else the contract will be declared invalid. This is because banks do not want to lend money to borrowers for homes that are more expensive than what they're worth. This clause could also suggest that the seller has the option to lower the price to the appraised value.
- Homeowners insurance contingency
The clause states that the buyer has to apply for and secure homeowners insurance for the property. If they aren't able to obtain the necessary insurance, either party can choose to back out of the contract. This is usually requested by either the seller or mortgage lender.
What Does Contingency Mean In House Hunting?
Now that you've learned about common contingencies, you'll be more prepared if you happen to stumble across active listings with a contingent status while you’re house hunting.
Even though you may want to buy one particular house, your agent may suggest that you continue to look at homes and possibly make offers on other properties if the house you're interested in is listed in contingent status. This is especially important in real estate markets having low housing inventory and a surplus of buyers.
The final thing you'd like to avoid is placing all your eggs into one basket only to get your offer overturned because of a contingency not working out. It is also possible to negotiate conditions that will restrict the sellers' right to accept any offer from new buyers. As always, trust your real estate agent to assist you in negotiating the most advantageous terms that fit your needs.
Contingent With A Kick-Out
It is important to note that sellers may want to include a kick-out clause while they are waiting. If there is a contingency with a kick-out, sellers can continue considering offers, and generally, they'll be considering offers with fewer contingencies than the initial offer.
Although contingencies can be crucial to protect you, it's also a good reason to structure your offer with as few contingencies as possible. However, the best part is that sellers do not have the ability to kick you out of the deal just because they've found an alternative offer. They have to notify you and give you time to eliminate the contingencies.
Contingent With No-Kick-Out
However, sellers could accept a contingency with a no-kick-out provision in a buyer's market. That will prevent them from accepting new offers while contingencies are in progress.
What is the difference between contingent and pending?
The terms pending and contingent are almost similar, but there are some significant differences. In other words, an accepted offer with contingencies begins as a contingent. When the conditions get fulfilled, the listing will move to the pending stage. An offer that is pending will be closer to being completed than an offer with a contingent clause, so it's generally not worth looking at pending offers.
How long will it take to go from contingent to pending?
This time frame is different between transactions. A deal that has fewer contingencies is likely to move more quickly than one that has many. A deal with no kick-out clause could take a bit longer because there isn't a deadline by which the purchaser must satisfy all the criteria.
Is It Still Possible To Make An Offer On A Contingent Home?
If you're looking at a property with an active contingent status, you might still be able to request an offer. Although the first offer will be considered once all conditions are met, making an offer could place at the head of the line in the event that the initial offer fails.
Remember that you'll need to present an offer that is more appealing than any other bids that the seller might have received. If you intend to submit an offer that is contingent, then the seller may decide to select one who made a non-contingent or cash offer. It's also advisable to get approved for your mortgage to prove to the seller that you're a serious home buyer.
The Bottom Line: Why Are Contingencies Important?
Contingencies can safeguard both the homebuyer and the seller. Making an offer dependent on too many factors can make a buyer seem less attractive to a seller, particularly when multiple offers are being considered.
The selection of contingencies to include in a contract as well as the specific terms to be included must be carefully considered. That's where an experienced attorney and/or real estate agent could be of assistance. By working with these professionals, you'll be able to ensure your negotiation is based on a strong position, and you'll have a backup strategy in case things don't go your way.
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