Navigating the complex terrain of real estate transactions can be challenging, particularly when contingencies are involved. As a home seller, it’s essential to understand the contingency definition in real estate and the ins and outs of these legal clauses to make informed decisions and optimize your home sale. In this article, we’ll explore real estate contingencies and how they can impact your home sale process.
What exactly is a contingency in real estate?
con· tin· gen· cy
/kənˈtinjənsē/
The Oxford Dictionary defines contingency as “a future event or circumstance which is possible but cannot be predicted with certainty; A provision for an unforeseen event or circumstance; An incidental expense.”
The contingency definition in a real estate contract is a condition that must be fulfilled for the transaction to move forward. Consider it a safety net, ensuring specific criteria are met before the sale concludes.
How Does a Contingent Offer Work?
When buyers propose a contingent offer, they’re essentially saying, “I’ll purchase your home if certain conditions are met.” These may include obtaining a mortgage or selling a current home, providing security for both parties.
Contingent Offer Example
For instance, a financing contingency might state: “This offer is contingent upon the buyer securing a mortgage loan at an interest rate of no more than 5% on or before June 20th.” Such specific terms ensure both buyer and seller are on the same page.
The Risks of Real Estate Contingencies
While they offer protection, contingencies also carry the risk of sales falling through. Weigh these against the benefits, considering market conditions and offer strength.
Do contingent offers fall through?
The frequency of contingent offers falling through varies with market conditions. It’s less likely in a seller’s market where buyers are keen to close deals.
What Does a Contingency Mean for Buyers and Sellers?
For home buyers, a contingency means they have a predefined escape route if something goes awry. For sellers, it signifies potential delays or the deal falling through if certain conditions are unmet.
Contingent vs. Pending in Real Estate: Understanding the Differences
Understanding the terms “contingent” and “pending” is helpful as these words provide insight into the sale’s status and indicate if buyers still have a chance to make an offer.
Contingent
When a property is listed as “contingent,” the seller has accepted an offer, but the final sale is contingent upon certain conditions that must be met. These contingencies are clauses in the sale contract that typically allow the buyer to back out of the agreement without penalty if the conditions aren’t met. Common types of contingencies in real estate include:
- Home inspection contingency
- Appraisal contingency
- Mortgage financing contingency
- Home sale contingency (the buyer must sell their current home first)
- Title contingency
Contingencies protect the buyer and allow them to address specific issues that may arise during the sale process.
Pending
When the status of a property is “pending,” it signifies that an offer has been made, all contingencies have been met, waived, or expired, and the sale is in the process of being finalized, but it has not yet closed. Pending status means the sale is more likely to go through, as all the major hurdles have been cleared. However, the deal is still subject to completion, which means that until the sale is officially closed, it is still not a done deal.
In some cases, you might see “pending taking backups” or “pending continue to show,” which indicates that the seller is still accepting backup offers in case the current deal falls through.
As a seller, understanding these terms is crucial as they indicate how far along in the selling process your property is, and they can also signal to potential buyers whether or not there is still an opportunity to make an offer on the property.
Types of Contingencies in Real Estate
1. Home Inspection Contingency:
Protects the buyer if significant defects are found during an inspection.
When crafting a comprehensive inspection real estate contingency clause for a home purchase contract, the objective is to protect the buyer while keeping the offer appealing to the seller. Here is an example
Home Inspection Contingency Clause
“This Agreement is contingent upon a satisfactory inspection of the property’s overall condition by a licensed home inspector. The buyer shall have the right to hire a professional inspector within ten (10) calendar days from the Effective Date of this Agreement (the “Inspection Period”) to conduct a comprehensive inspection of the property.
If the inspection report identifies defects that the buyer deems unsatisfactory, the buyer may, at their sole discretion, provide the seller with a written notice of the defects and either:
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- Request that the seller perform the necessary repairs or offer a credit to cover said repairs, or
- Terminate this Agreement without penalty, wherein all earnest money deposits shall be promptly refunded to the buyer.
In the event the buyer elects to proceed under option 1, and the seller is unwilling or unable to make the requested repairs or offer a satisfactory credit within five (5) calendar days of receiving notice, the buyer retains the right to terminate the Agreement, and all earnest money deposits shall be returned.
If the buyer does not provide written notice of the defects or an intention to terminate the Agreement within the Inspection Period, the contingency shall be deemed satisfied, and the buyer shall be expected to proceed with the purchase.
The buyer agrees that this contingency shall not be used as a negotiation tool for reasons other than genuine concerns raised by the inspection report. Furthermore, the buyer acknowledges that minor cosmetic defects or normal wear and tear, as detailed in the attached addendum, shall not constitute grounds for invoking this contingency.
This clause is intended to ensure a fair and equitable process for both the buyer and seller regarding the property’s physical condition and to foster confidence in the transaction.”
2. Mortgage Contingency:
Ensures the buyer can secure financing at agreeable terms.
A mortgage contingency, also called a financing contingency, is a clause in the purchase contract that states the transaction is contingent upon the buyer obtaining financing from a bank or other financial institution. Below is an example:
Mortgage Contingency Clause
“This offer is conditional upon the Buyer obtaining a mortgage loan for the purchase of the property within thirty (30) calendar days from the Effective Date of this Agreement (the “Financing Period”). The Buyer agrees to apply promptly for the mortgage loan and to furnish all required documentation to the lender in a timely manner.
The Buyer seeks to obtain a loan on the following terms:
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- Loan Amount: Not less than 80% of the purchase price
- Interest Rate: Fixed rate not to exceed 4.5% per annum
- Term: 30 years amortization
If the Buyer is unable to secure a commitment for financing on or before the expiration of the Financing Period, under terms that are consistent with or more favorable than those outlined above, the Buyer may cancel this Agreement by written notice to the Seller, provided such notice is given on or before the last day of the Financing Period. Upon cancellation, all earnest money deposited by the Buyer shall be returned, and both parties shall be released from all obligations under this Agreement.
Should the Buyer fail to notify the Seller of the inability to secure financing by the end of the Financing Period, this contingency shall be deemed waived, and the Agreement shall remain in full effect.
It is understood that the Buyer shall act in good faith to obtain a mortgage loan from a reputable lender and that the Buyer shall not unreasonably withhold consent to terms that are substantially similar to those described above.”
3. Appraisal Contingency:
Tied to the home’s value being confirmed by a professional appraisal.
An appraisal contingency protects the buyer and ensures that the property’s value, as determined by a professional appraisal, meets or exceeds the agreed-upon purchase price. Here’s an example:
Appraisal Contingency Clause
“This purchase agreement is conditional upon a satisfactory appraisal of the property, which must confirm that the property’s appraised value is at least equal to the agreed purchase price. The Buyer shall have twenty-one (21) calendar days from the Effective Date of this Agreement (the “Appraisal Period”) to obtain a property appraisal from a licensed appraiser.
If the property is appraised at a value less than the agreed purchase price (the “Appraisal Shortfall”), the Buyer has the option to:
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- Proceed with the purchase at the agreed purchase price despite the Appraisal Shortfall;
- Renegotiate the purchase price with the Seller in good faith to reflect the appraised value, or
- Terminate this Agreement by providing written notice to the Seller within three (3) business days following the receipt of the appraisal report, in which case the Buyer’s earnest money deposit shall be fully refunded.
If the Buyer chooses to renegotiate the purchase price and the Seller is unwilling to lower the price or if the parties cannot reach an agreement within seven (7) calendar days from the Buyer’s notification of the Appraisal Shortfall, the Buyer may terminate this Agreement with a written notice to the Seller, resulting in a full refund of the earnest money deposit.
In the event the Buyer does not notify the Seller of their decision within three (3) business days after the Appraisal Shortfall, the right to terminate this Agreement based on the Appraisal Contingency shall be waived, and the Buyer shall be required to complete the purchase at the originally agreed purchase price or as otherwise renegotiated.
This contingency is to ensure that the Buyer is not obligated to complete the transaction if the property does not appraise at the minimum value required by the lender to secure the mortgage loan, thereby safeguarding the Buyer’s financial interests.”
4. Title Contingency:
Guards against legal property ownership issues.
A title contingency ensures the buyer has the right to verify that the seller has a clean, unencumbered title to the property before finalizing the purchase. Here’s an example of a title contingency:
Title Contingency Clause
“This Purchase Agreement is contingent upon a satisfactory review of the title to the property. The Seller shall provide the Buyer with a current title report prepared by a licensed title insurance company within ten (10) calendar days from the Effective Date of this Agreement (the “Title Review Period”). The Buyer shall have the right to review the title report to confirm that title to the property is free of defects, encumbrances, liens, or other conditions that are unacceptable to the Buyer (collectively, “Title Defects”).
Should the title report reveal any Title Defects that could materially affect the Buyer’s interest in the property or future resale value, the Buyer shall notify the Seller in writing of such defects no later than five (5) calendar days after the Buyer’s receipt of the title report.
Upon receipt of such notice, the Seller shall have the option to:
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- Cure the Title Defects before the closing date, at the Seller’s expense, and provide the Buyer with evidence of such cure, or
- Negotiate with the Buyer to reach a mutual agreement to address the Title Defects, or
- If neither (1) nor (2) is achievable, the Buyer may terminate this Agreement without penalty, and all earnest money deposited by the Buyer shall be promptly refunded.
If the Seller does not respond to the Buyer’s notification of Title Defects within five (5) calendar days, or if the Title Defects are not cured and no agreement is reached by the closing date, the Buyer shall have the right to terminate the Agreement unilaterally, with a full refund of earnest money.
The failure of the Buyer to notify the Seller of any unacceptable Title Defects within the stipulated Title Review Period shall constitute acceptance of the title as-is, and this title contingency shall be deemed waived.”
5. Home Sale Contingency:
Allows the buyer to back out if they cannot sell their current home.
A home sale contingency in real estate is designed for buyers who need to sell their current home to finance the purchase of a new one. This ensures they will not be legally bound to buy a new home if they cannot sell their current one. Here’s an example:
Home Sale Contingency Clause
“This Purchase Agreement is contingent upon the Buyer selling their current home, located at [Buyer’s Current Home Address], no later than [specified number of days] days from the Effective Date of this Agreement (the “Home Sale Contingency Period”).
The Buyer agrees to list their current home for sale within [number] days of the Effective Date of this Agreement and to pursue the sale diligently and in good faith. The Buyer is required to promptly inform the Seller of any offers received and the status of the sale process.
If the Buyer’s current home has not sold by the end of the Home Sale Contingency Period, the Buyer shall have the option to:
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- Extend the Home Sale Contingency Period by mutual agreement with the Seller, subject to additional terms as may be agreed upon, or
- Release both parties from this Purchase Agreement without penalty, allowing for the full refund of the Buyer’s earnest money deposit.
In the event of a release from the Agreement, notification must be made in writing to the Seller no later than one day following the expiration of the Home Sale Contingency Period. Upon such notification, all obligations of the Buyer and Seller under this Agreement shall cease, and the Buyer’s earnest money deposit shall be returned forthwith.
Suppose the Buyer’s home sells and the sale closes within the Home Sale Contingency Period. In that case, the Buyer shall notify the Seller in writing within [number] days of the closing, confirming their intention to proceed with the purchase of the Seller’s property as per the terms of this Agreement.
Should the Buyer fail to either extend the Home Sale Contingency Period or elect to terminate the Agreement should the Buyer’s current home not be sold, the Buyer shall be obligated to proceed with the purchase without regard to the sale of their current home, and the earnest money deposit may be subject to forfeiture as per the terms of this Agreement.”
Essential Insights on Contingencies in Real Estate
Contingencies are primarily used for buyer protection but can also introduce uncertainties for sellers. Understanding these clauses is key to a smooth transaction. Always consider the contingencies attached to each offer, as they can significantly influence the outcome of your sale.
Sellers with the right information and strategic insight can navigate these clauses for a successful sale. Remember that outcomes vary, and so does the relevance of different types of real estate contingencies. Knowing when to accept an offer with contingencies can significantly influence the selling experience and outcome.
Remember to stay proactive during the sale process. For instance, consider the contingencies attached to each offer if your home has multiple offers at the same price. An offer without a sale contingency might be more attractive than one that hinges on the buyer selling their current home, even if the offer with the contingency is slightly higher.
In today’s fast-paced real estate market, your situational awareness and ability to make informed decisions quickly will set you apart and can make a difference in a successful transaction.
Being well-informed and decisive is crucial in today’s dynamic real estate market. For guidance through the complexity of contingencies, reach out to an IDEAL AGENT® today for a smooth home sale process. Ready to get expert advice from top-performing agents for as low as only 2% commission? Just enter your address and find your IDEAL AGENT® today.
FAQs About Contingencies in Real Estate
This typically refers to a 10-day period during which certain inspections must be completed.
Home inspection contingencies are among the most common types of contingencies in real estate. They allow buyers to verify the property’s condition.
Both buyers and sellers can benefit, though they primarily protect buyers. Home sellers can also add contingencies to their contracts, giving themselves an “out” and making the sale contingent upon certain conditions being met, like having another contract to buy a house, ensuring they have a place to move to. Sellers who want to back out of a deal can legally do so if a contingency written into the contract isn’t met.
This largely depends on your circumstances, market conditions, and the specifics of the offer. It can be helpful to consult with a seasoned IDEAL AGENT® professional who can guide you through the complexities of contingencies in real estate with the expertise and dedication you deserve.
