What Is A Contingent Offer?
Ashley Chorpenning8-minute read
November 09, 2020
Purchasing a home can carry a lot of risks – therefore, there are several processes in place that protect both the buyer and the seller once the buyer has made an offer. When a buyer’s offer is accepted by a seller, the buyer and seller enter a contract. Most of the time, buyers and sellers enter contracts optimistically, but buyers may learn things about the house or may encounter other obstacles that interrupt the sale.
Contingent offers protect buyers when common problems arise. These problems can be big enough to dissuade a buyer from following through on the purchase of a home or can lead to a renegotiation of the contract. Both buyers and sellers can benefit from contingent offers.
Contingent Offer Defined
A contingent offer is made by a prospective home buyer to a seller with conditions attached that must be met before the sale can be completed. If the criteria is not met, buyers are entitled to a refund of their earnest money.
An offer on a home and a purchase contract indicates the price that the buyer agrees to pay for a home as well as the conditions under which they agree to purchase it. The contract will include responsibilities for both the buyer and the seller.
A buyer’s main duties include getting approved for financing, having the home inspected and appraised, and doing so in a set period. The seller’s duties often include an agreement to not accept other offers and to make the home available to inspectors.
These responsibilities are laid out in the contingencies. The contingencies are built into the contract to protect the buyer and help both parties avoid an unjust agreement.
What Are Some Common Contingencies?
In a contingent offer, a buyer could make an offer with a contingency on anything – but sellers are unlikely to agree. Sellers do not have to accept every contingency that a buyer puts into a contract, and both parties must agree on all contingencies before signing a contingent offer.
As the buyer, you can choose which contingencies to include in the contract. An experienced realtor can help you decide which contingencies to include based on their knowledge of the home and of the housing market.
The following are the most common contingencies that appear in real estate contracts.
The home inspection contingency means that if the home inspector finds issues with the home during the inspection, the buyer can walk away from their contingent offer. Inspections are done for the benefit of the buyer.
The home inspector will evaluate the inside and outside of the property and look for any damage or substantial wear and tear. While a home inspection is meant to evaluate the home, it may also be wise for buyers to have the home inspected by specialists for things such as mold or insects.
The home inspection typically takes place within days of making a contingent offer so the buyer can decide right away if there is a reason for them to walk away from the sale. The inspection happens before the appraisal, and the home buyer is typically financially responsible for the home inspection because it protects them from purchasing a home with significant issues.
An appraisal contingency affects the financing process. If a home does not appraise for the amount that a buyer has agreed to pay, the buyer can walk away from the deal with their deposit. The appraisal process determines the fair market value of a home, so an appraisal contingency helps buyers avoid overpaying for their homes or ending up upside down in their mortgages.
An appraisal contingency and a financing contingency often go together. This is because a lender will ask for an appraisal before approving any financing. The appraisal contingency ensures that the buyer is protected if the sale price of the home is higher than the appraised value of the home.
If the home is appraised at a lower value than the agreed-upon sale price, the seller might be allowed to lower the price to the appraisal amount. The contingency typically includes a date by which the buyer must alert the seller of any discrepancies between the sale price and the appraised value. This allows the seller to negotiate the sale price.
If the buyer does not alert the seller of any discrepancies, the contingency will not be considered satisfied and the buyer will not be able to back out of the transaction. If they do back out, they may not receive their earnest money.
The financing contingency is also called a mortgage contingency. It is a clause in a purchase agreement that says that the buyer must secure financing for the property. It is important to note that preapproval does not mean that a buyer is approved for a mortgage. A preapproval is simply the start of the home buying process.
After being preapproved for a loan and selecting a home, the buyer must get approved for a mortgage. At this stage, a bank or lending institution will take an in-depth look at the buyer’s financials and decide if they will lend to the buyer. The lender reserves the right to deny a loan request.
There are a few things that can go wrong after being preapproved that would impede a buyer’s ability to secure financing. Some things may include not having the right documentation to get approved for a mortgage or having a significant change in the financial situation since being preapproved.
These changes might be large purchases or a negative impact on income such as a job change or job loss. Additionally, even if a buyer is approved for a mortgage, they might not have enough funds to cover the closing costs on a home.
If a buyer is not approved for a mortgage or is not approved within the number of days specified in the contingent offer, the buyer will receive their earnest money back and the house will remain on the market.
If the buyer does not get approved for a mortgage and fails to let the seller know, they will automatically waive the contingency and will be obligated to purchase the property, even if a loan is not secured.
Another important contingency is the title report. The title report will tell the buyer that the home is free and clear of any liens and gives the buyer the right to review a title report. The title report documents the home’s history of ownership.
Most of the time, a lawyer or a title company will review the title on a home before the closing. If there are any issues, these institutions will resolve any discrepancies so that the buyer can have the title transferred to them free and clear.
A buyer might want to consider purchasing title insurance. Title insurance compensates the insured buyer or lender if there is a defect on the title, liens, or if there are any competing claims of ownership on a property after the closing. Title insurance will protect a buyer in case there is a title dispute on their property by compensating them for any loss and will cover any legal fees related to the dispute.
Home Sale Contingency
One of the less common contingencies is a home sale contingency. This means that the purchase of a new home is contingent on the buyer’s ability to sell their current home. It states that if the buyer sells their home by a specific date, they will purchase the new property and the contract will move forward. If they do not, then the contract is terminated.
Sellers are far less likely to accept this contingency than the others on this list. This is because a home sale contingency has a lot of risks and would leave the seller on the market in the case that the buyer does not sell their existing home.
Although sellers do not always approve home sale contingencies, they are popular amongst buyers. Buyers like home sale contingencies because they help buyers avoid owning two homes at once or being without a home. Though buyers can still choose to include home sale contingencies, sellers – especially those in a sellers’ market – are not likely to approve them.
There are two types of home sale contingencies, sale and settlement, and settlement. A sale and settlement contingency states that the potential buyer is trying to sell their current home but has not yet received an offer.
A settlement contingency states that the buyer has an offer on their home or has a contract in hand, but the closing has not yet taken place. A settlement contingency prohibits the seller from accepting any other offers after signing a contingency offer. Sellers are more likely to accept a settlement contingency than a sale and settlement contingency.
How Does Including A Contingency Protect Buyers?
Purchasing a home can be risky. There could be structural issues with a property, or the ownership of a property could be disputed. Therefore, buyers need to include contingencies on their offers so that if they find something wrong with a property, the contingency will void the sale contract.
Voiding a contract means that the seller can relist their home and the buyer will get their earnest money back. This helps protect buyers who put earnest money down on a home to ensure that they are both entitled to purchase the home if they choose, but not entitled to move forward with the purchase of a home if it is not in their best interest upon further inspection.
What Happens If Buyers Choose Not To Include A Contingency?
Depending on the real estate market, a buyer might be tempted to make a “clean” offer on a home. This means that they choose not to include a contingency and is a common occurrence in a bidding war. If a home has multiple offers, a buyer might think that it is a good idea to not include any contingencies to motivate the seller to choose their offer over others.
Waiving a contingency might mean that a buyer is removing any possible restrictions for the seller and easing the sale of the home. In a seller’s market, this can help the seller but does not guarantee that the seller will choose the offer with no contingencies. If a seller has multiple offers including backup offers, they can choose to accept a backup offer if the first buyer backs out or if their contingencies fall through.
However, choosing not to include a contingency carries significant risks. If a buyer cannot purchase a home without financing or the inspector finds something wrong with the home, the buyer will be forced to either cancel the contract or purchase a home with issues.
This means that the buyer will lose their earnest money and potentially be forced into legal fees as well. In some states, the seller may sue the buyer if they experience financial losses from taking the house off the market.
If you plan to make an offer without contingencies, it is wise to do what you can to minimize risk. Therefore, you should get preapproved for a mortgage and know how to recognize the signs of problems in a home.
This can help you to alleviate some of the risks of buying a property without contingencies. It is also wise to have extra money on hand for after the closing of the home in case you need to make any improvements following your purchase.
Summary: Contingencies Protect Buyers
Purchasing real estate is a big commitment. When purchasing, contingencies in a contract help protect buyers by securing their sale but also protecting them in case they choose to back out of a sale after learning more about a property.
Some sellers will not accept all the clauses or contingencies included in a contract, so it is wise to be judicious about which contingencies you choose to include. Be sure to protect yourself from a bad real estate deal by including contingencies in your offer.
If you want to learn more about buying a home, be sure to check out our Learning Center. There, you will find information on purchasing a home including answers to common questions about mortgages, the home buying process, and more.
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