The post What Is Contingent in Real Estate? by Alison Plaut appeared first on Benzinga. Visit Benzinga to get more great content like this.
Buying a home or investing in real estate is a powerful way to build equity and long-term wealth. If you’ve ever considered buying a home, you’ve probably heard the term contingencies. And while shopping for real estate, you might have seen a home listed as contingent. A contingency is any stated uncertain criteria when the initial purchase contract is signed. Real estate transactions fall through if the contingencies aren’t met. A contingent home means an offer was accepted, but the contingencies must be met before it closes. Read on to understand contingent in real estate and what it means for your home-buying journey.
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What Does Contingent Mean in Real Estate?
Contingent in real estate means that a home is under contract. The seller has accepted a potential buyer’s offer, and the due diligence or other contingencies are in process. When you make an offer on a house, it’s a good idea to include contingencies to protect yourself in case issues come up before closing.
How Do Contingent Offers Work?
A contingent offer works like a standard real estate transaction, except contingencies must be met. This protects the buyer and their earnest money deposit. For example, if you’ve deposited $10,000 in escrow, having strong contingencies in place can help assure that you won’t lose the down payment if the real estate transaction doesn’t go through.
Common contingencies include:
- Mortgage contingency
- Title contingency
- Home inspection contingency
- Sale of a prior home contingency
- Appraisal contingency
- Homeowners insurance contingency
For example, if a seller offers a certain price and you, as the buyer, accept the price provided the home inspection comes back clean and you can secure a mortgage for that amount, you have made a contingent real estate contract. In this case, the final sale depends on the inspection not turning up problems defined in the contract and you securing a mortgage.
In the purchase contract, you may include additional contingencies. Other than the home sale contingency, which won’t apply to all buyers, the other five contingencies should be common in most home transactions.
What Is the Difference Between Pending and Contingent?
The difference between pending and contingent in the context of real estate is how far the property is in the sale timeline. A pending property has already met all contingencies and the sale is being processed. A pending transaction will close. On the other hand, a contingent property must still meet certain contingencies. These can be everything from the buyer securing a mortgage or selling their existing home to the property passing a home inspection.
Common Contingencies in Real Estate
There are many common contingencies in real estate. Understanding them and adding them to your purchase contract can help ensure you’ll get the earnest money deposit back if the sale doesn’t go through. Here is an overview of the most common contingencies you should consider.
1. Mortgage Contingency
With a mortgage contingency, the buyer has a specific window of time to secure financing for the purchase, or they can withdraw from the purchase without penalty.
2. Home Inspection Contingency
A home inspection contingency is perhaps the most common contingency. This states the time the buyer has to secure a professional inspection. If the inspection finds serious, previously undisclosed issues, the buyer can terminate the contract and recover their deposit.
Suppose you sign a purchase contract on a beautiful home that needs no renovations. Then, the home inspection uncovers cracks in the foundation or other major structural issues that can cost tens of thousands of dollars to repair or even make the home unsafe. In that case, you can renegotiate the purchase price or terms with the seller or back out of the sale and recover your earnest money.
3. Title Contingency
This ensures that if the title search turns up any issues or the title is not free and clear, the buyer may back out of the sale without penalty. Title issues can include undisclosed liens or mortgages on the property and issues with the seller’s ownership related to the title.
Other title issues that could turn up include:
- Property not registered
- Lost title deeds
- Restrictive covenants
- Easements
- Boundary disputes
- Restrictions or notices registered against the property
- Lease defects
- Title classification not upgraded
4. Home Sale Contingency
Many buyers need to sell their existing residence to afford the downpayment and closing costs for the new home. A home sale contingency clause will protect you if you need to sell your existing home before purchasing a new home. If you cannot find a buyer within a specified time, you can cancel the contract penalty-free. If you don’t want this contingency, learn how to buy a house before selling yours.
5. Appraisal Contingency
An appraisal contingency protects your investment, as it stipulates the property must appraise for the indicated sales price, at minimum, or the contract can be nullified. Mortgage lenders will require an appraisal to approve the mortgage, so this clause may be more important for buyers who didn’t include the mortgage contingency. This clause may also indicate that the seller can choose to reduce the price to the appraised value.
Even if you’re getting a mortgage, adding an appraisal contingency ensures you’re not paying more than the property is worth.
Finally, you may consider adding a homeowners insurance contingency. With this contingency, the buyer may include a clause stating they have a certain amount of time to secure homeowner’s insurance, and if they cannot do so, may back out of the contract penalty-free. While you should be able to get homeowner’s insurance, it’s always good to cover all possibilities.
How Do Contingencies Benefit the Buyers?
Contingencies are a major benefit to buyers, ensuring you can recover your earnest money. Contingencies are designed to protect the buyer’s interests in a real estate transaction. It allows you to terminate the real estate contract for a variety of reasons without losing your earnest money.
Perhaps most fundamentally, contingencies protect you in case of events outside of your control, from financing falling through to the property failing inspection. It ensures that you’re not left in a difficult situation buying a property that requires major repairs or that you’ll lose your earnest money if a mortgage lender doesn’t approve your application.
What Happens if a Contingency Falls Through?
According to iBuyer, statistically speaking, you have a 96.1% chance that once you make an accepted offer, the sale will close. That means there’s only a 3.9% chance that contingencies will fall through. Other sources suggest similar figures. A survey from the National Association of Realtors found that 5% of home sale contracts in June, July and August 2022 were canceled. During those same three months, 15% of sales contracts were delayed.
That varies from buyer to buyer and by individual situation. If, for example, you have a low credit score or no credit score, you may fail to get mortgage approval, increasing the chances that the transaction will fall through. Likewise, in slow buyer’s markets, a contingency to sell your existing property may not be met.
If a contingency falls through, you and the seller have a couple of options. You can cancel the sale contract and recover your earnest money. Or, you can renegotiate the contract with new information about the contingency. For example, if the home fails certain aspects of inspection, the seller may offer to make those repairs. Similarly, if you are approached by a serious buyer just before the contingency deadline and need more time to sell your home, the seller may be willing to extend the offer.
Final Tips on Contingent Offers in Real Estate
If the home you want to buy is contingent, and the seller accepts your offer, it means you have time to perform the necessary due diligence. You will need to organize an inspection, appraisal and title search as well as get organized to meet other contingencies such as securing financings.
Contingencies protect your interests and ensure you can recover your earnest money if the seller isn’t transparent about the state of the property or you have difficulty getting a mortgage. Is this your first home? Check out Benzinga’s best loan guide for first-time homebuyers.
Frequently Asked Questions
Can a contingency be waived?
Yes, a buyer can choose to waive a contingency. In addition, in a seller’s market, some buyers or investors may choose to waive all contingencies to make their offer more attractive to the seller.
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How long do contingencies typically last?
Contingencies typically last 30 to 60 days. You can also find more first-time homebuyer questions and answers here.
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Can contingencies be added after the contract is signed?
No, generally, contingencies cannot be added after the contract is signed. You could ask the seller if you may add a contingency after signing.
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The post What Is Contingent in Real Estate? by Alison Plaut appeared first on Benzinga. Visit Benzinga to get more great content like this.