Contingency: What it means and how it works
The process of a home purchase can be stressful because of the number of details and a certain amount of unpredictability. For example, if a seller were to pull their home from the market after you spent time and money on the process, you could be left with an expensive waste of time.
To account for this uncertainty, the progress of a home sale is almost always “contingent” and based on the completion of related transactions. In simpler terms, to protect both the buyer and the seller, certain things have to happen before the process can move forward.
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What is a contingency in real estate?
Contingent means that something will occur only when certain requirements are met. For example, a college acceptance letter might be contingent on the student completing high school with a minimum grade-point average.
Each stage of depends on some condition being met. This is known as a contingency clause and outlines certain aspects of the home sale that must be completed before the contract can become binding.
Contingency clauses give the buyer or seller the right to walk away from the sale if agreed-upon circumstances aren’t met. Details included in a contingency clause might include a requirement for the taken out, set timeframe for the buyer to secure financing, and the home passing inspection and appraising for the sales price.
Contingencies in real estate hold both parties equally accountable, and noncompliance can qualify as a breach, which would void the contract.
What is a contingent offer?
In terms of a housing transaction, contingent means the seller has accepted the buyer’s offer but with certain requirements to be met. That usually means the buyer must then secure financing to proceed with the purchase. If the buyer fails to do so, the seller can back out of the deal.
Common contingencies in real estate
By structuring a transaction in conditional stages, everyone involved in the sale can be sure the next phase will proceed without cancelation or delay. Here are some of the most common contingencies in a home purchase.
Home inspection contingency
A home inspection is a routine step during the homebuying process, and it could uncover condition issues with the home. Plumbing, electrical, structural and other problems can That can allow a potential buyer to negotiate the purchase price or request that the seller make repairs as a condition of the sale.
Mortgage contingency
A real estate transaction not paid in full will require financing. The purchase will depend on the buyer securing a home loan before moving forward. A financing contingency typically gives the buyer a certain amount of time to find a lender to extend them a mortgage loan. If they’re unable to do so within the agreed-upon timeframe, the deal could end without a sale.
Appraisal contingency
Before a lender approves financing, an estimate of the home’s value, known as a usually is required. Home appraisals establish a fair value for the home based on the condition of the property and local real estate market.
An appraisal contingency allows a buyer to legally back out of a sale if the appraised value of the home comes back lower than the sales price.
If the appraiser’s estimate does come back below the asking price, you might have to cover the difference yourself. Your lender will finance only the appraised value unless the sales price is lower, so a higher price won’t be covered by a loan. If the seller does not agree to a renegotiated asking price, the appraisal contingency clause could allow the buyer to cancel the home purchase without legal consequences.
Title contingency
If liens or easements are in the home’s public record, they will be revealed by a . This search ensures that discrepancies related to the home’s legal ownership will be uncovered before the sale moves forward.
If the title of the home is contested, the buyer could face a long process to clear up the issue.
Rather than investing time and resources into an ownership dispute, you might start looking for a different home. Title contingency allows the buyer to walk away from a sale without legal consequence when ownership disputes are an issue.
Home sale contingency
Before you move into your new home, you might need to sell your current one. A home sale contingency makes sure the new home cannot be purchased until the buyer sells their current home.
The sale contract can be terminated if the buyer’s home isn’t sold by a certain date.
Can you make an offer on a house that is contingent?
If a seller is not confident that a sale will go through or if you are looking to buy in a market that is especially competitive, the seller might consider backup offers until the sale has closed.
You can certainly enter an offer with the hope that contingencies will halt the initial offer, and it is relatively common that sales fall through because of contingencies.
The seller won’t be able to consider other offers until the initial offer either ends in a sale or falls through. But if it does fall through, you could be first in line for consideration.
