Buying a house is still one of the top ways to build wealth, and real estate sales are up. However, although 5.64 million existing homes traded hands in 2020, according to data from the National Association of REALTORS®, there are no certainties in any real estate transaction. Every one has an element of surprise regarding how the process will play out because every seller, buyer, situation and house is different.
As a buyer, you want to protect yourself against the unexpected, given the fact that there is so much uncertainty, the purchase is so large and it involves so many parties. That’s why most home sales are made “contingent” on what happens next, which allows buyers to back out if something goes wrong as the sale moves through the process on the way to completion.
What Does Contingent Mean In Real Estate?
“Contingent” in any sense means “depending on certain circumstances.” In real estate, when a house is listed as contingent, it means that an offer has been made and accepted, but before the deal is complete, some additional criteria must be met.
For instance, if a seller offers a certain price and you, as the buyer, say the price is fine (provided the home inspection comes back clean), you have made a contingent real estate contract. In this case, the sale of the house depends on the inspection not having problems defined in the contract.
How Does A Contingent Offer Work?
With a contingent offer, you have stated that a certain condition must occur before the sale moves forward. If it doesn’t, the contract is void, and the seller can move on to a backup offer received while the sale was contingent. Contingencies are often used to protect the buyer from problematic home listings or unforeseen issues within the real estate transaction.
Returning to our example above, let’s say that we make the offer contingent on the home inspection showing a roof life of 15 remaining years. If the inspector deems the roof only has 7 years left, that’s unacceptable and an active contingency status will be placed on the home. The home seller might then decide to fix the roof or adjust the price, or the potential buyers might decide to exit the contract, which they can without penalty since they had the contingency in place.
What Are Common Contingencies In Real Estate?
Keep in mind that a seller might prefer that the offer comes with no contingencies. The buyer, of course, wants to make an offer that protects them by including contingencies because if you eventually back out of your offer without a contingency escape clause, you may lose the earnest money that you offered to seal the deal.
Adding contingencies can be risky, especially in a “hot” market where lots of home buying activity occurs. Other prospectivebuyers might make an offer without a contingency, making their offer look more appealing than yours and more likely to be chosen by the seller.
For example, if you have a contingency that your own house has to sell for you to complete another home purchase, but another buyer’s offer doesn’t, the seller might decide that they don’t want to wait around for that eventuality. You want to use the contingency clause judiciously to make sure your offer is as attractive as it can be.
Wondering what contingencies you might consider? Here are several common ones.
Home Inspection Contingency
The home inspection contingency allows a home inspector to assess the condition of the home, checking out all the aspects of it that might not be visible to the eye or that the current buyer might not think about, like grading or flashing. If the inspection reveals serious flaws in the home’s condition that have been spelled out in the contract, the buyer may back out, or the buyer and seller may negotiate over who will pay for it to be fixed.
In other words, even though you might have a home inspection contingency, you don’t have to walk away because there’s an issue with the house. You and the seller might agree on how to cover the repairs and resolve them.
A mortgage contingency gives the buyer a specific period of time to secure financing. The good news is that this is a financingcontingency that can be mostly handled by doing some due diligence. First, you want to ensure that you have been preapproved for a mortgage as a buyer, not just prequalified.
The preapproval puts you far closer to actually getting the mortgage as it entails relatively lengthy paperwork upfront to make sure your finances are in order. But remember that being preapproved still doesn’t mean you qualify for a mortgage. Once you make an offer, you’ll need to do your final check with your lender.
Ideally, all the paperwork will fall into place because you’ve already gone through the majority of it in the preapproval phase. But there are still elements that can trip you up, such as if you’ve changed jobs, experienced a dip in your credit score or had another financial issue that unexpectedly makes you a less worthy candidate. It’s important to take excellent care of your finances during this phase to ensure there are no unpleasant surprises when you finalize your mortgage.
The appraisal contingency comes into play most often when you’re taking out a mortgage. The seller might be asking for a wild sum, and you might be all too happy to pay it, given the values in the neighborhood. But that asking price doesn’t necessarily reflect the value of the home. Lenders require an appraisal, which is a third-party look at what the home is actually worth.
Even though both parties agree on a sale price, the lender can’t offer you a mortgage that’s larger than what the home is appraised for. In a very overheated or rapidly changing real estate market, meeting that appraisal number can often be an issue, but that doesn’t mean you’re out of luck.
If you have the cash to pay more upfront to make up the difference between the amount of the mortgage loan and the agreed-upon purchase price, or you can renegotiate, you may be able to overcome this.
Many buyers have been fooled by this tricky piece of paper. The home’s title reveals who actually owns the house and who has owned it all along the way. However, sometimes homes don’t have “clean titles.” They might have encumbrances like easement issues or a mortgage lien from the past.
Any claims against the title can make a purchase risky for buyers. The good news is that title searches should reveal those problems before closing. And even if there’s an issue that you’re able to clean up, it’s wise to get title insurance, which protectsagainst future claims.
Home Sale Contingency
This contingency is related to the buyer’s financial situation and notes that the sale will only go through if your current home sells first. While this can protect you, it’s common for sellers to reject this in a seller’s market, as the seller knows there may well be another buyer who doesn’t have this restriction.
Of course, that doesn’t mean that you have to have the cash on hand to buy the new house before you sell yours. Your lender may be able to help you with a “bridge loan” or suggest other financial strategies. Rocket Mortgage® doesn’t do bridge loans, but our friends at Rocket LoansSM may be able to help you with a personal loan.
Another way around this issue is to ask for a later-than-normal closing date, which gives you more time to sell your house. Remember that some sellers might reject your offer because of this if they want to close the sale quickly, but it might be attractive to other sellers shopping for a new home themselves or who want to finish the school year in their home, for example.
What Does A Contingency Mean When House Hunting?
Even though you might have your heart set on a specific house, your real estate agent will probably recommend that you keep looking at houses and even make other offers while the house you want is in a contingent listing status. That’s particularly important in real estate markets with low housing inventory and a surplus of buyers.
The last thing you want is to put all your eggs in one basket and have your offer overturned due to a contingency not working out. You may also wish to negotiate terms that limit sellers’ rights to accept new offers. As always, rely on your real estate agent to help you negotiate the best terms for your situation.
Contingent With A Kick-Out
Note that sellers might request a kick-out clause while they wait. In a contingency with a kick-out, sellers can continue to consider offers, and they will generally be looking at ones with fewer contingencies than the first offer.
While contingencies can be important to protect you, this is another reason to make your offer with as few contingencies as possible. But the good news is that the sellers can’t kick you out just because they find a better offer. They must notify you and give you a certain period of time to remove the contingencies.
Contingent With No-Kick-Out
On the other hand, sellers may accept a contingency with a no-kick-out provision in a buyer’s market, which would prevent them from accepting new offers while the contingencies are worked through.
What’s The Difference Between Contingent And Pending?
Contingent and pending are two terms that are often confused, but that indicate different parts of the sales cycle.
In the contingent sale, the seller has accepted an offer, but everyone is still working through the issues. Eventually, the sale moves to “pending,” which means the issues have been resolved, and the deal is almost done. At this stage, all parties are simply waiting for documentation to be completed so the sale can move to “closing.”
Once you’re in the pending stage, you’re almost there. Most sellers will not continue to show the home while it’s pending, as they are contractually precluded from accepting offers. The house is almost yours!
The Bottom Line: Why Do Contingencies Matter?
Buying your dream home can create a lot of stress – after all, it’s likely the biggest purchase you’ll ever make until you buy another house, and it can be nerve-wracking to take the step. Fortunately, there are safeguards in place when you make an offer in the form of contingencies that can protect you as you move through the home buying process. However, as you can see, they also can come with pitfalls if the seller chooses not to accept an offer with them.
Want to learn more about the home buying process? Check out our library of home buying articles that cover a wide range of issues, and don’t forget to lean on your real estate agent, someone who can help ensure you have all the information you need for this life-changing purchase.
Article previously published on rocketmortgage.com