While flipping through listing statuses online, you may come across the word “contingency” – just one of the many terms and acronyms that come up during the homebuying journey. But whether or not it applies to your homebuying experience, it’s a great idea to learn about this concept long before your final walkthrough.
In this article, we’ll answer the question: “What does contingent mean in real estate?” It’s a good idea for both home buyers and sellers to understand because an offer with contingencies may impact both parties throughout the process.
Let’s walk through some common contingencies, how a contingent offer works, types of contingent statuses and how to accept an offer with a home sale contingency.
What Does ‘Contingent’ Mean In Real Estate?
When a listing is “contingent,” it means that an offer has been made and a seller has accepted the offer – but the sale can’t go through until certain conditions or actions are met.
We’ll take a look at some of the most common contingencies in the next section to give you a better understanding of how contingencies work.
What Are The Most Common Contingencies?
The most common contingencies include:
- Inspection contingency: A home inspection contingency protects a buyer in the event that issues are found during the home inspection. By ensuring that the inspection occurs within a specific time period, the buyer can cancel the contract, ask the seller to make repairs and/or re-negotiate the purchase price. Some of the more major issues that arise during an inspection could include problems with the roof, HVAC system or foundation.
- Appraisal contingency: An appraisal contingency gives buyers an option to back out of the contract based upon the findings of the home appraisal. If the home is appraised for less than the purchase price, the buyer can terminate the contract without losing their earnest money deposit.
- Financing contingency: A financing contingency, also called a mortgage contingency, leaves time for a buyer to secure a mortgage loan from a lender.
- Home sale contingency: A home sale contingency means that the purchase is contingent upon the buyer selling their current home. The contract moves forward as long as the buyer’s home is sold by a specified date.
How Does a Contingent Offer Work?
When you find a home you want to make an offer on, it’s important to know that you can write a contingency clause into your offer. As the buyer, you can ensure that the common contingencies (listed above) are met.
The seller then has the option to accept the contingent offer, reject it or make a counteroffer and get rid of the contingency. If the seller accepts the contingent offer, they can do one of two things:
- Take the property off the market and expect that the conditions will be met
- Write a kick-out clause into the contract, which keeps the house on the market just in case a better offer comes along.
If the thought of writing contingencies into your offer sounds daunting, remember that you’re not alone during this process. A real estate agent or lawyer can help both buyers and sellers with these steps.
Once everyone agrees on the conditions of the sale price and purchase, the conditions of the contract will be fulfilled and the buyer and seller can close on the house. Ultimately, contingencies can protect both parties from unforeseen issues.
Types of Contingent Statuses
Let’s take a look at a few types of contingent statuses:
- Contingent with kick-out: A kick-out clause allows home sellers to continue showing the home. It gives them the option to accept a better offer even after the initial contingent offer has been accepted.
- Contingent with no kick-out: In a contingent with no kick-out clause, the seller has accepted a contingent offer. The seller cannot accept another offer unless the contingencies are not fulfilled.
- Short sale contingent: A short sale contingency means that while the short sale is still in progress, a home is no longer for sale because an offer has been accepted.
- Contingent probate: When someone dies without a designated beneficiary, a home is sold in probate court and the state administers the sale of the property. There are usually no contingencies on probate sales.
Accepting an Offer with a Home Sale Contingency
As a seller, you’ll want to carefully review any home sale contingencies before accepting an offer. Accepting a contingent offer only means that you might sell the home. If you take your home off the market and the home sale contingency isn’t met, you may find yourself back at square one.
You may want to periodically check to see if the buyer has made progress on their home sale and negotiate terms in your favor by potentially adding a kick-out clause.
Note that you can also consider a backup offer. If the first offer falls through, a backup offer acknowledges an existing offer and ensures that you can get a contract with a different buyer. It puts another buyer in “second place” as a precautionary measure.
Why Do Contingencies Matter?
Issues can come up anytime you’re selling or buying a home, so contingencies shouldn’t be overlooked. And while you might think that they only benefit buyers in pursuit of their dream home, contingencies can offer protection for both parties; voiding a contract means that a seller can relist their home.
Contingencies are also vital to the closing for both buyers and sellers because they eliminate any ambiguity over who will pay for what. They also pave a way legally for either the seller or the buyer to cancel the agreement.
Remember that the offer must include any desired contingencies to protect you as a buyer. If you suddenly find something wrong with the property through an inspection but didn’t include an inspection contingency in the contract, the contract cannot be voided on the grounds that the home has a faulty roof or foundation.
Ready to learn more? Know your rights as a home buyer and learn about other key topics such as “what is escrow?” and “making an offer on a home.” The experts at Morty.