A contingent offer is a type of real-estate agreement in which the buyer offers to buy a property only if certain conditions are met, and the seller agrees to these conditions.
This type of offer is typically seen with buyers who are waiting on the sale of their current home to go through and want to ensure that they will be able to buy a new home by a specified date. It also works for buyers who need to obtain financing from a lender and sell their current home before they can afford to purchase another property.
Generally speaking, contingencies are an important part of the negotiation process, as they protect buyers and sellers from finding themselves in a bad deal.
What Is a Contingent Offer
A contingent offer is a type of offer that is set up to become active only under certain conditions. It is sometimes called a contingency, but in this case, it does not have a “time limit” for its activation on the contract. Such an offer can be made by either seller or purchaser, depending on the nature of the clause.
Usually, a contingency gives one party the option to alter the original contract if certain conditions are not met or if certain events occur that render the contract void.
For example, in a real estate transaction, a buyer may agree to purchase a property only if the inspection or appraisal comes back with certain terms.
Let’s say the inspection report comes back, and there are significant repairs that need to be made to the property. The buyer can then choose to renegotiate their purchase price with the seller, or they may cancel the contract entirely. Alternatively, the seller could agree to make the repairs themselves before going through with the sale.
In this case, the contract would be considered “conditional.” And as with any contract, if the terms are not met, then the parties are not bound by their agreement. If the seller refuses to make repairs or renegotiate the price and the buyer chooses to walk away from the deal, then they aren’t obligated by anything except whatever they agreed upon earlier – usually, money paid upfront (or returned).
It is, therefore, important to understand your contingencies in any real estate contract, whether you are a buyer or seller.
What Are the Types of Contingencies?
Property Inspection Contingency
An inspection contingency is a clause in the purchase contract that gives buyers a chance to inspect the property they are purchasing. If the inspection results are not satisfactory to the buyer, they can opt-out of the purchase contract by giving notice to the seller.
The contingency clause also specifies what type of inspections will be conducted and when this must take place. It is common to include inspections for termites, sewer and water systems, the roof, plumbing, and electrical wiring.
The buyer is responsible for the cost of all inspections. If a major problem is discovered during any of these inspections, it will be up to the seller to repair or replace the item in question. Once this has been done, then the buyer can approve or reject the property.
This contingency is a clause in a real estate contract that allows the buyer to walk away from an offer if the value of the property is determined to be less than the agreed-upon price.
Appraisals are conducted by licensed appraisers and take into account the size, location, age, and condition of the property, as well as recent sales data for similar properties in order to determine value.
If an appraisal comes back lower than the agreed-upon purchase price, the buyer can use this contingency to renegotiate their offer or walk away from the deal altogether.
It is important to note that the appraisal contingency only applies to properties that are being financed by a mortgage. If the buyer is paying for the property in cash, they would not be able to use this contingency. Also, the appraisal is paid for by the buyer and not the seller.
In a real estate transaction, a mortgage contingency is a condition in which the buyer agrees to buy the property only if they can obtain financing for the purchase.
The buyer may be able to obtain financing from a bank, private lender, or even an individual. If the buyer chooses to apply for a mortgage loan from a bank or mortgage lender, they will usually be required to submit financial information like tax records and bank statements to prove that they can afford the home.
Often, this is done in conjunction with an appraisal of the property’s value so that the lender can see that the buyer is making a solid investment. The offer may also include a preapproval letter from the bank or mortgage company stating that it believes the buyer will be able to secure financing for the purchase.
However, it’s important to note that with a mortgage contingency, it doesn’t mean that you have to obtain a preapproved mortgage, but rather that your mortgage must be approved before closing on the property. In other words, your financing needs to be approved by the lender at closing.
If everything checks out regarding your credit score and income level (among other factors), you should be able to get the loan. If not, then you’ll need to either renegotiate with the seller or find another way to come up with the money for the purchase or walk away from the deal.
This contingency protects you from any title issues that may arise when you purchase a property. This type of contingency is typically used when purchasing a home because there are many different factors that can affect the title, including liens and easements.
For example, if you purchase a home that was previously inherited, the seller may not be aware of any liens against the property. If there is a lien on the property and it goes unnoticed until after closing, you may be liable to pay it back.
This is why it’s important to check for any potential problems that may arise with the property’s title by doing a title search.
A title search is a review of the property’s ownership history, which can turn up any liens or easements that may already exist on the property. This search can be performed by the buyer’s real estate attorney or a title agency that specializes in conducting this type of search.
Sale of Home Contingency
A sale of home contingency is a clause in a contract that allows the buyer to terminate the agreement if he or she is unable to sell his or her current home. It is a common provision for buyers who are already homeowners and are looking to sell their current property in order to purchase a new home.
Many buyers include this clause when they are uncertain of the housing market’s ability to sell their current property. If the market is good, they may be able to find a buyer quickly and move on with their new purchase.
However, if the market is slow or unstable, it may take months (or even years) to find a buyer for their current home, during which time they would be paying two mortgages. So in order to protect themselves from this burden financially, buyers often include the clause in their real estate contract.
For sellers, this contingency can be a source of stress because it introduces the possibility that the deal may fall through entirely.
If the buyer is unable to sell their home, they may back out of the deal, and the seller will have to find a new buyer, which means that the seller would have wasted time and will need to start the entire home selling process from the beginning.
This is why most sellers prefer to avoid contracts with sale of home contingencies or will only accept them if the buyer agrees to certain conditions, such as a shorter timeline for selling their home or providing proof that they have already secured financing.
Why Are Contingencies So Important in Real Estate?
Contingencies are important in real estate because they help protect the buyer and seller from certain risks.
For example, a contingency may be included in a contract that stipulates that the sale is only final if the buyer is able to obtain financing within a certain period of time.
This protects the seller from having to wait indefinitely for the buyers to secure funding, and it also protects the buyer from losing their deposit if they are unable to get approved for a loan.
Without contingencies, neither party would be protected from these risks which could lead to financial losses and other problems down the road.
The Bottom Line
Buying a home is a huge financial decision. So, it’s important to understand all the steps of the home-buying process before you dive in.
One key step is understanding contingent offers; these can help sellers feel more confident that buyers are serious about buying their homes and can give buyers some extra negotiating power.
But there are also some risks associated with making a contingent offer, which is why it’s important to know exactly what they are before signing on the dotted line.