What Does Contingent Mean in Real Estate + How to Save You Money
Before my wife and I became real estate investors, we didn’t know much about negotiating or making offers. When we made a full-price offer on our current primary residence, our real estate agent recommended we make a contingent offer. We looked at each other and asked, “What does contingent mean?”
The contingencies he added to our purchase agreement had a fantastic effect. We were able to acquire our primary residence $16,000 below the list price!
A contingent offer can have pros and cons depending on what kind of buyer you are, a homeowner or a real estate investor. Sellers can also take advantage of a contingent offer. However, it depends on the condition of the real estate market.
What Does Contingent Mean in Real Estate?
A contingent status means a real estate listing indicating that the seller has accepted an offer but that there are contingencies that prevent the sale from being final. Contingencies are special conditions or requirements set by the buyer before fully agreeing to the purchase.
For example, a purchase agreement has a contingency that states that the appraisal value meets or exceeds the purchase price. If any of the contingencies are not satisfied, then the buyer is allowed to back out of the purchase agreement without penalty and can get back their earnest deposit.
On the other hand, if the buyer or seller meets all the contingencies, the buyer or real estate agent will add an addendum to the purchase agreement to remove the contingencies. Afterward, an agent can change the real estate listing status to the pending status.
How Long is a Contingent Period?
A contingency period gives a buyer a certain amount of time to satisfy certain contingencies. After the contingency period expires, those contingencies are no longer applicable.
For example, a 10-day contingency for a home inspection on a townhouse means a buyer has ten days to conduct a home inspection and determine if the results are satisfactory.
Everything in real estate is negotiable including the contingency period. However, a shorter contingency period can make your offer more attractive!
When I was pursuing a new investment property, I set a 48-hour contingency period as a part of my offer. After it got accepted, I acted like a madman trying to reach out to my various contractors to have them take a look at the property.
Can a Buyer Put an Offer on a House that is Contingent?
A backup offer is when another buyer puts an offer on a house that is contingent. If the initial offer falls apart due to some contingency, the seller can review back up offers.
You should first reach out to the listing agent to see if the seller accepts backup offers. A seller’s agent could include a Kick Out clause that would allow a seller to back out of a contingent offer.
In that case, the seller will give the first buyer a First Right of Refusal. The First Right of Refusal is when a buyer has an opportunity to remove contingencies if another buyer makes a better offer!
For example, a better offer can be a full-cash offer with no inspections. Or, it can be a better offer with fewer contingencies.
There are multiple ways a seller can get out of a contingent offer. It all depends on how creative your selling agent is.
Contingent vs. Pending: What is the Difference?
The real estate terms contingent and pending are listing statuses in the Multiple Listing Service (MLS). They represent a phase of the home buying process, letting potential buyers know the availability of the property.
In some places, the word contingent and pending are used interchangeably and treated the same. However, in other areas, pending means that a seller has accepted an offer and there are no contingencies.
Additionally, the number of days a house is on the market stops accruing after an agent changes the contingent listing to a pending one.
Agents like to advertise that their houses don’t sit on the market long. One reason is that a low number of days does not deter other buyers if the first deal falls apart.
For example, a home buyer that sees a listing that was weeks old can make them think that something is wrong with the house and move on to look at another home.
The Different Types of Real Estate Listing Statuses
Below are the different types of statues that are used by the MLS (Multiple Listing Service):
- Active: The property is available, and the seller is accepting offers.
- Contingent: The seller has accepted an offer, but there are contingencies.
- Pending: The has seller has accepted an offer, and there are no contingencies. However, there are subsets of the pending status:
- Taking backups: Seller can accept backup offer in case financing falls through.
- A short sale: The sale price is less than the mortgage balance, usually for foreclosed properties.
- Extending for many months: This pending status is usually for construction projects that have gone beyond their timeline.
- Sold: The property has closed and no longer available.
Types of Contingencies
Buying a house can be the biggest purchase you’ll ever make. You want to make sure that you have confidence and peace of mind when buying. Below are common contingencies buyers include as part of their offer.
Home Inspection Contingency
A home inspection contingency is when a buyer hires a home inspector to check different parts of a house. An inspection gives a prospective buyer peace of mind and leverage to negotiate. If the inspection report does not satisfy the buyer, they can walk away from the deal without penalty.
Inspectors check major systems, such as electrical, plumbing, HVAC, roof, etc. They also test the appliances in a home, such as a dishwasher, washing machine, sprinkler system, and more.
Seller’s do not like home inspection contingencies because inspectors will always find something! If the inspector finds something significant, the law requires the seller to disclose that information to back off offers.
After a home inspection has completed, the seller and buyer have a few options:
- The seller agrees to resolve some or all the issues in the inspection report.
- The seller agrees to reduce the purchase price to resolve the issues at the buyer’s expense.
- The buyer and seller can’t agree and walk away.
I had a mainline sewer inspection performed on one of my properties. The inspector discovered that the mainline sewer pipe had three cracks in the line.
The seller didn’t want to spend money on the repair but understood that he would have to disclose the issue if we didn’t move forward. We ended up agreeing that he would pay a majority of the cost up to a certain amount, and I would make up the difference.
Some sellers only allow information-only home inspections. This type of assessment allows the buyer to have peace of mind still when making the purchase.
However, it removes any ability for the seller to negotiate a price. This strategy is commonly used by investors knowing that there are required renovations.
Home Sale Contingency
Home sale contingencies are when an offer is contingent on the sale of the buyer’s current home. If the buyer cannot sell their home before closing, then the buyer can walk away.
From my experience, sellers have not had an issue with this contingency. They understand that the buyer has to sell their home as well. Therefore, sellers and buyers usually agree to a more extended contingency period for a home sale contingency, such as 60 days, to give the buyer time to close on their property.
Instead of a home sale contingency, some sellers opt for a settlement agreement. In this case, the seller depends on the buyer having their house under contract versus waiting for it to sell.
Appraisal Contingency
An appraisal contingency is when the appraisal valuation of a house must meet or exceed the purchase price. Lenders order appraisals on properties to justify financing a buyer’s purchase.
The seller can’t increase the purchase price if the appraised value is significantly higher per the terms and conditions of the existing real estate contracts. However, they can walk away and re-list the property.
Some sellers combat this contingency by stating that the buyer must make up the difference between the appraisal valuation and the purchase price. Other sellers avoid appraisal contingencies, especially when buyers get into a bidding war, and only accept cash offers.
I’ve seen houses receive offers of $30,000 above the list price, but only to be put back on the market because it was above the fair market value.
For my wife and I, we put a full-price offer of $250,000 on our house. However, the appraisal valuation was $209,000, which is below the purchase agreement.
The seller saw the valuation and had the option to pay for another appraisal. However, they were already committed to their new home and didn’t’ want to go through the process again!
Thus, they agreed to lower the purchase price, and we acquired our primary residence $16,000 below the list price!
Mortgage Contingency
A mortgage contingency is when an offer is contingent on the terms of the mortgage. During the underwriting process, a lender has the ability not to approve a buyer’s loan request, regardless of mortgage insurance) and gives the buyer the ability to back out of the deal.
For example, a buyer states in their current contract that they need approval from their lender. Their mortgage contingency states it needs to be approved for an interest rate of 5% or less and a term of 15 years. If the lender can’t approve a 15-year term or less, the mortgage contingency fails!
This contingency is another added protection for the buyer to avoid losing their earnest money deposit. For this reason, the seller wants to see a pre-approval letter or proof of funds when considering an offer. They want to gauge how likely a lender will approve a buyer’s mortgage request.
Title Contingency
A title contingency is when a title company performs a title search to verify that there are no liens on the property or if there are any taxes due. A title company will also check if there are any easements or shared lands, such as a driveway.
If the buyer is not satisfied with the title report’s findings, the buyer can walk away.
Financial Contingency
A financial contingency sometimes interchanges with the term mortgage contingency. However, in this regard, this contingency deals with the buyer providing their earnest money deposit to the title company within a specific time frame.
An earnest money deposit is a form of good faith from the buyer that they are serious about the agreement. If at any moment the buyer breaks the deal, the buyer loses their earnest deposit. Some buyers offer a high earnest deposit of $10,000 to improve their chances of winning a bidding war!
Usually, purchase agreements state that a title company will receive a deposit within 48 hours of the seller agreeing to the offer. If the buyer is unable to deliver, the purchase agreement is void, and the seller can walk away.
Right of First Refusal Contingency
A Right of First Refusal contingency is one of the few contingencies in favor of the seller. This contingency is in conjunction with the seller accepting back up offers.
A seller has the right to refuse the current purchase agreement if the seller receives a better back up offer. The seller will usually give the current buyer 24 hours to 72 hours to remove the agreement’s contingencies.
Otherwise, the seller can walk away and begin working with the new buyer.
Conclusion
It’s normal that an offer comes with contingencies. It’s an excellent way for a buyer to protect themselves from a future headache and a financial disaster!
It can cost about $6,000 to replace an HVAC, at least $5,000 to replace a roof, and over $7,000 to replace a mainline sewer pipe.
However, a sale contingent upon a certain condition is hated by sellers. Sellers prefer to accept offers with little to no contingencies as attractive offers.
If a great deal comes along and you start getting into a bidding war, weigh the pros and cons if it’s worth the risk of reducing your contingencies. The key is to get the seller to accept your offer first then negotiate!
