What Does Contingent Mean in Real Estate?

Table of Contents:

Contingencies in Real Estate

Contingencies in real estate occur once a seller has accepted an offer on a house. Before the contract can be completed, certain contingencies or conditions must be met with approval.

This phase or period is when the house is in contingency. The contingency period usually lasts for 30 to 60 days and is designed to protect the buyer if there are any issues before completing the purchase. It provides time for the buyer to evaluate the house and get their financing in order. It also protects the buyer should the deal fall through during the contingency phase allowing them to recoup the earnest money placed on the house.

Typical Contingencies

Typical contingencies in the house buying process include:

• Mortgage: This is done during contingency if a buyer needs to gather mortgage financing. If the buyer cannot collect the necessary funds, the home will not be sold to them. This is a non-issue in the case where a buyer is purchasing the house with all cash.

All cash offers expedite the closing and make bids very attractive to sellers, but most buyers must secure a mortgage to finance a house.

• House inspection: An inspector reviews the home to look for any issues or flaws.

The issues are shared with the buyer and seller, so they can agree on how to fix the concerns. If there is no agreement, the contract can fall through.

• Appraisal: During contingency, an appraisal is completed by the bank lending the funds for the mortgage to determine the value of a house. If the sale price of a house is much higher than its actual appraised value, the buyer may have a hard time finding the funds to cover the house’s sale price. Lenders will not lend beyond the appraised value of the house.

In some cases, the appraisal value of a house will come in lower than the price listed by the seller. The buyer will need to pay the price difference with cash, or the seller will have to lower the price of the house to meet the appraisal value. Often the appraisal value will be lower than the listing price in highly competitive markets where the “market value” of the house is much higher than its actual value due to inflation and other economic conditions affecting the market.

• Sale of existing house: This occurs when the purchase of the house by the buyer is based on the sale of their existing house. This is risky for sellers because they must rely on the buyer’s house being sold quickly. Often buyers may need to sell their house to afford the new house. A couple of ways around this for buyers is to attempt to push out the closing date of the new house to maximize the amount of time they have to sell their existing house before purchasing the new house. Buyers can also get a temporary loan from a lender to cover the cost of the new house with the expectation their existing house will sell shortly.

• Title insurance: There may be an issue where the title company finds the house may not be fully owned by the seller due to prior liens or chain of title documentation. Also, encumbrances on the property that dictate how the land can or cannot be used or accessed in certain ways may be a concern. If there are these types of title-related matters during contingency, the sale may not close.

Frequently Asked Questions (FAQ)

What does contingent mean?

The dictionary cites the meaning of contingent as dependent for existence, occurrence, character, etc., on something not yet certain; conditional (often followed by on or upon). In the case of a contingent house, certain conditions must be met for the sale to close. The contingency phase exists to protect buyers primarily from purchasing a house without having the time to fully inspect and gather the financing for the house.

What is contingent property?

A house is contingent when a seller has accepted an offer on a house, but the sale is not yet final. Some certain approvals and actions need to be taken before the sale can move into the next phase of the transaction.

Can a buyer put an offer on a house that is contingent?

Yes, a buyer can put an offer on a contingent house as the listing will still be active. Doing so does not ensure the buyer will get the house as another offer has already been accepted but the buyer will be the next for consideration if contingencies are not met and the transaction falls through. Rarely do offers fall through, so it is important to be strategic about the timing and amount of the offer placed on a house, especially in a competitive market.

What is the difference between pending and contingent?

When a house is contingent, there are several conditions to address, and there is a higher likelihood of the deal falling through. Once the contingencies have been addressed, the deal moves to pending.

The deal may fall through when it is pending as well, but it is much less likely to do so as most or all issues were addressed when the house was in contingency.

What is the difference between contingent and pending in real estate listings?

Contingent listings occur on a house before the house moves to a pending listing.

There are still many conditions to meet when a house is a contingent listing before it is ready to move to a pending listing. Once the issues or contingencies are addressed, the transaction moves to pending and then closes.

How long is a contingent offer good for?

Contingent offers last for some time, somewhere between 30 and 60 days. During this time, the buyer will often get an inspection done on the house, get the house appraised, secure a mortgage on the house, work with a title insurance agency to ensure the title is “clean” and settle any conditions with the seller before finalizing the purchase of the house. Often, if there are issues with the home inspection, the seller will need to resolve with a repair or replacement, particularly replacement of costly items before the buyer agrees to purchase the house.

How often do contingent offers fall through?

Contingent offers do not fall through very regularly. On average, only about five percent of deals do not make it through closing. It is important to stay vigilant as a buyer in a seller’s market and make as competitive of a bid as possible right when the house hits the market. Some reasons the contingent offer may fall through include the house being overvalued, the title not being clear, issues with getting financing, the home inspection showing issues with the house and the buyer not being able to sell their existing home.

Beating a Contingent Offer

There are several ways to beat a contingent offer on a house. Knowing how to do so is especially significant in a seller’s market, where the seller will likely receive numerous offers.

Finances

Most importantly, buyers should focus on getting pre-approved for a mortgage and improving credit scores before putting an offer on a house. Pre-approval lets buyers know an estimate of the dollar amount lenders will be willing to let them borrow and is based on the buyer’s income and other factors. It also provides the buyer with an idea of the range of home prices they can afford when starting a house search. Additionally, it is helpful to pay off credit cards and increase credit scores as much as possible before putting an offer on a house. The more the buyer can prove financial viability, the higher the likelihood of beating any other offers placed on the house.

Bidding

Once the buyer is ready to put an offer on a house, one of the best ways to beat other offers is to make the highest bid. This should be done within reason, staying mindful of the buyer’s budget and advice from the realtor based on the market, but ultimately putting in an offer above the listing price of the house increases the chances of outbidding other contingent offers.

Additionally, if a buyer is very serious about a house, but the house is already in contingency with another buyer, they can ask if the seller is accepting backup offers. If so, it would be part of the contract with the existing buyer called a kick-out clause. The clause allows the seller to keep accepting offers when the contingency phase is active, and the house is undergoing inspection, appraisal, etc. If the seller then receives an offer from a different buyer during this phase, the original buyer will have a few options, including countering with a higher offer and possibly waiving some or all contingencies in the existing contract.

If the original buyer does not take these actions, the contract could fall through, and the new buyer will have a chance to purchase the house.

Additional tactics for beating a contingent offer include:

• Don’t require an inspection: Not requiring an inspection can be a risk because the buyer is not checking to make sure the property is in good shape.

There may be less visible issues with the house that the inspector would find that could be very expensive to repair or replace. Asking for repair records could help with this.

• Offering an all-cash bid: Offering an all-cash relieves any worry the sellers have about the buyer being able to finance the house.

• Writing a personal letter: A buyer sharing a personal story and the meaning the house would bring to their lives could sway the sellers, particularly in the case where the seller is wavering between two potential buyers. It helps to keep in mind the house is where the seller created memories and lived their lives. If they feel they are passing their house to a buyer who will also value their house the way they did, it may make all the difference in selecting one specific buyer over another.

• Include an escalation clause: Including an escalation clause with the initial contract allows the buyer to increase their first bid by a certain amount should any offers come in that are higher than theirs. This gives the buyer a chance to counteract any competing buyers within the restraints of their budget should there be multiple offers on the house.

• Offering to drop all contingencies: Buyers can waive all contingencies. Doing so speeds up the sale process, which sellers value because it gets their home off the market quickly and reduces possibilities of the sale falling through. This may be particularly effective if the seller has experienced a prior sale falling through during contingency.

• Being accessible: Sellers want to sell their homes quickly. Buyers and their real estate agents should be easily accessible and respond quickly to the seller during the home buying process.

Maintaining a sense of urgency in submitting requests and answering questions helps with the efficiency and flow of the deal, increasing the odds of closing on the house.

Summary

Contingencies in the house buying process are designed to protect buyers from several factors that could be to their detriment in a housing purchase. Primarily, contingencies provide buyers with ample time to fully examine and gather the finances to purchase the house.

It is important as a buyer to stay knowledgeable about contingencies and how to beat a contingent offer, especially in a seller’s market.