What Is A Contingent Offer?
Buying a home is a transaction that involves many moving parts. Real estate deals can fall through for a number of reasons. When the unexpected occurs, home buyers may find that they’re on the hook financially for a property they no longer want or can afford.
Instead of hoping for the best, buyers have tools at their disposal that they can use to prepare for the unexpected. Contingent offers can help protect buyers financially. In this article, we’ll explain what contingent offers are and how they impact real estate transactions, so you can decide if you should make or accept one.
What Is A Contingent Offer In Real Estate?
A contingent offer is an offer made on a property, which stipulates that specific conditions must be met for the sales contract to be binding. These contingencies, or stipulations, are typically set in place by the buyer to give them the opportunity to walk away from a real estate transaction without losing money if something goes wrong.
A contingent offer is often made when the buyer is unsure whether they’ll obtain the funds they need to purchase the property. However, a contingent offer may also be made if the buyer is concerned that the property is overpriced or in poor condition.
How Does A Contingent Offer Work?
When a buyer finds a property they want to purchase, they can write a real estate contingency clause into the offer they make on the home. After the offer is made, it’s up to the seller to either accept the contingent offer, reject it or make a counteroffer that eliminates the contingency.
If the seller is willing to accept the contingent offer, they typically have two options. The seller can take their property off the real estate market and hope that the condition stipulated in the contingency is met. Or the seller can write a kick-out clause into the sales contract that enables them to keep their property on the market to see if a better offer comes along. If they receive a better offer, the seller must give the original buyer a chance to purchase the property within a specific time window.
In most cases, real estate agents – and at times, attorneys – will help facilitate this process. A buyer’s agent will advise the buyer on whether they should include a contingency, write up the offer and convey it to the listing agent (or for sale by owner seller).
A listing agent will inform the seller of the offer, advise the seller on whether they should accept the contingent offer and negotiate with the buyer’s agent (or buyer if they are not represented by an agent). Once the terms are accepted by both the buyer and seller, the contract is drawn up, and the parties eventually close on the home.
Types Of Contingencies
There are certain contingencies that home buyers commonly write into their offers. Let’s take a look at each one in more detail.
A buyer who requires a mortgage to purchase a property may choose to include a mortgage contingency clause in their offer. This contingency will enable the buyer to break the contract and walk away from the deal without losing their earnest money deposit if their financing is delayed or falls through.
While an accepted mortgage contingency will protect you in the case of financing setbacks, you should still get preapproved for a loan. Doing so will streamline the process and provide the seller with confidence that you’ll ultimately be able to obtain a loan large enough to cover the sales price of the home.
Home Sale Contingency
A buyer who does not need a loan but is reliant on the funds from the sale of their current home to purchase a new one may opt to include a home sale contingency clause in their offer. This contingency provides the buyer with a specific time to sell their home. If they cannot secure a buyer within that time and therefore cannot obtain the funds necessary to purchase the new house, they’re free to withdraw their offer and recover their deposit without consequences.
Home Inspection Contingency
After making an offer, it’s customary to have the home inspected. Sometimes, a home inspection can reveal serious, unexpected issues with the property that may affect the buyer’s desire to purchase the home or willingness to pay the price initially offered.
With a home inspection contingency, buyers are provided with the ability to void the sales contract or renegotiate the offer. When renegotiating, a buyer has the power to insist that the seller makes repairs or lowers the purchasing price based on the cost of the work needed. When a buyer and seller can’t reach an agreement, the buyer again has the option to walk away.
Before agreeing to provide financing, lenders require properties to be appraised. They do this to ensure they’re not lending more money than a home is worth. When appraisals come in lower than the purchasing price, home buyers are still on the hook for the agreed-upon price and must find a way to make up the difference. This is unless, of course, they included an appraisal contingency in their offer, in which case buyers can break the sales contract if the home appraisal is less than the purchasing price.
Benefits Of Contingencies
Contingent offers primarily benefit buyers, as contingencies provide them with a way out of what would otherwise be a binding agreement. By allowing buyers the opportunity to back out of contracts without financial repercussions, contingencies alleviate the stress of the unknown. Furthermore, buyers who are juggling the purchase of a new home while selling their old one don’t have to pay for two mortgages at once.
Contingencies provide awareness that a deal can fall through, which is beneficial to sellers because it allows them to prepare. The ability to write a kick-out clause into the contract means that sellers can continue showing their home and accepting backup offers as they wait to see if their initial deal closes. Sellers may even receive more attractive offers during this time, though they must still give their initial buyers the right of first refusal.
The Bottom Line: Contingent Offers Can Help Protect Buyers
In situations where there are specific unknowns that buyers want to protect themselves against, contingent offers are a useful tool. By making contingent offers, buyers can sign otherwise binding contracts and not worry about suffering financial consequences if necessary conditions aren’t met.
However, when you’re buying, you should be aware that sellers are often wary of accepting contingencies. If you’re buying a home in a seller’s market, there will likely be a lot of other buyers competing for the same properties. When the real estate inventory is low, choosing to include a contingency in your offer is risky, because the seller is more likely to reject it.
If you’re planning to make an offer on a home, getting a head start and having your approval in hand can put you in a stronger bargaining position with the seller. Why not get started today?