Buying a home is an exciting time — and a big investment. It’s important to know what to expect as you enter the process, including factors that could impact the success of your purchase. Contingencies are one of those factors. They put criteria in place to protect both buyers and sellers, and they are considered in one way or another during every home sale.
So what does contingent actually mean in real estate?
In the sections that follow, we’ll walk through the basics of contingencies, types of contingencies that exist, and what to know from both a buyer and seller perspective about how contingencies affect home sales.
- About 75% of home sales in 2022 had a contingency attached.
- Real estate contingencies are set and resolved during the offer and negotiation stages of the home sale process.
- Types of contingencies include home inspection, mortgage, home sale, and home appraisal.
- Kick-out clauses allow sellers to consider other offers while contingencies are resolved, while no kick-out clauses prevent them from doing so.
- Buyers may waive contingencies to sweeten their offer and increase its likelihood of being accepted.
What does contingent mean in real estate?
In the real estate industry, “contingent” means that a home must meet certain criteria before a sale can be finalized. Contingencies protect buyers and sellers from hidden or unforeseen issues that would significantly impact a sale. According to the National Association of Realtors (NAR), about 75% of home sales in 2022 had a contingency attached.
Some contingencies are more common than others, and in certain situations buyers may waive contingencies to increase the likelihood of their offer being accepted. We’ll cover those cases in more detail later, but for now, let’s walk through how contingencies work in practice.
How do real estate contingencies work?
Real estate contingencies are identified during the offer and negotiation process. Stated contingencies are worked into the contract, and the contract is void unless those contingencies are met.
For example: one of the most common contingencies in real estate is the home inspection. In this case, an offer is made with the contingency that the home must pass inspection without any major issues not already disclosed by the seller. If it doesn’t, the buyer can back out of the purchase.
Home inspection, however, is just one of many types of real estate contingencies. Let’s go over some of the other common types.
What are some common types of contingencies?
Home inspection contingency
As mentioned, home inspections are a common — nearly standard — real estate contingency. A home is expected to pass inspection by a professional before a sale is finalized. If issues are identified, buyers and sellers can negotiate them to work out an agreement. Sometimes, sellers lower the sale price to compensate for needed repairs. Other times they make the repair prior to the sale being finalized.
Home sale contingency
Home sales state that the buyer’s current home must sell before the new home purchase closes. This contingency is used to protect the buyer’s financial situation, but sellers will often reject it in favor of non-contingent offers in a competitive seller’s market.
Mortgage contingencies give buyers time to secure mortgage financing during the period between offer and final sale. To avoid potential problems in this situation, it’s best for buyers to be at least pre-approved before they begin their home search. Pre-approval dramatically increases the likelihood of being approved for a mortgage loan.
Under a mortgage contingency, if buyers are not approved for a mortgage within a certain period of time, sellers can pursue other offers.
A home title is a legal document that shows ownership of a property. In some cases, the title of a home for sale may have issues like an encumbrance or a mortgage lien. A title contingency means the title must be “clean” of issues prior to the sale closing or a buyer may back out of the sale without penalty.
A home appraisal determines the value of a home. An appraisal contingency states that the home must appraise at an amount at least equal to the asking price so that the lender approves the mortgage. If not, the buyer can negotiate a lower price or back out of the purchase.
Kick-out vs. no kick-out contingency
Contingencies may have different statuses as they go through. Sellers may request what is called a kick-out clause, which allows them to field additional offers on their home while they wait for contingencies to go through. If a more attractive offer is made (like one with less contingencies), they can accept it.
On the other hand, buyers can request a no kick-out provision to prevent other offers from being considered while contingencies are being worked out.
What’s the difference between contingent and pending?
Contingent and pending status are often confused, even though they represent different stages of the home sale process. During contingent status, issues are still being worked out that could affect whether or not the sale goes through. Pending status means those issues have been resolved, the sale is nearly complete, and it’s usually just a matter of paperwork to make it final.
Why would a buyer waive a real estate contingency?
There are times when a buyer may waive contingencies — even common ones, like home inspections — to make their offer more attractive to the seller. This happens mostly in a seller’s market, when securing a new home is more competitive for buyers. In a bidding war scenario, waived contingencies can increase the likelihood of an offer being accepted over others that are made.
Can you make an offer on a contingent listing?
You can make an offer on contingent listings when there is no kick-out clause, but its chances of being accepted are lower unless you waive contingencies or sweeten your offer in some other way (like offering a higher purchase price).
Putting it all together
Real estate contingencies are a tool that can protect both the buyer and the seller. Depending on factors like home value, needed repairs, and buyer finances, the leverage can lean toward either the buyer or the seller when contingencies are implemented.
In any case, it’s important for both parties to consider the state of the market and other factors that can influence how smoothly contingencies are resolved, and whether it’s their best option to buy or sell a home.
Thinking about moving to Dayton? Oberer Homes can help you find (or build!) a home you’ll love. Contact us today to learn more!
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