If you’ve ever sold a home, you’ve probably at least run across the term “contingency” along the way. Your first instinct probably has been to find out what “contingent” means in real estate, as well as if and how it might affect your ability to sell.
A simple definition of “contingency” is “a condition or action that must be met for a real estate contract to become binding.” The contingency becomes part of a binding contract when both the buyer and the seller agree to the terms and sign.
There are a lot of nuances to contingencies in real estate and here we are going to cover some of the most common home buying contingencies.
Common Types of Contingencies in Real Estate
Since the definition of “contingency” is fairly open-ended, practically anything could be a contingency. Most fall within the bounds of common sense and established practice, but there have been some rather unusual contingencies over the years.
The following represent some of the most common and important contingencies in real estate.
Home Inspection Contingency
A home inspection contingency gives the buyer the right to have the house inspected professionally within a certain period. It also allows the buyer to cancel the contract (or negotiate repairs) if they are not comfortable with the inspection results.
The contingency is written into the original purchase agreement. Once the inspection has taken place, an addendum to that agreement clears the contingency clause. Unless further negotiation is needed based on the results of the inspection, the sale moves forward.
This clause is usually added to protect the buyer in case they are unable to secure mortgage financing. These contingencies also specify a date by which an official approval for a mortgage needs to be in place.
If a buyer is unable to secure a mortgage before the contingency period ends, they might request an extension. However, granting the extension is entirely up to the seller, and various factors could impact the seller’s decision to extend or not.
For example, the seller might allow the extension in a cooling housing market or if the house in question isn’t in the best shape.
The appraisal contingency says the house must be appraised at the sale price or higher. This usually is intended to help the buyer get a mortgage.
Here’s the process: The buyer’s bank hires a licensed appraiser to determine the home’s fair market value. This is based on comparisons, known as “comps,” with similar properties that might, for example, be in better condition.
If the home is appraised at less than the buyer’s offer, then the buyer is able to pull out of the contract. This is because the bank may refuse to approve the buyer for a large enough mortgage, causing the buyer to have to put more money down to be able to afford the home.
At this point, the buyer and seller may negotiate to lower the price to something closer to the appraised value, or the buyer may decide to just put more money down in order to purchase the property.
Home Sale Contingency
With a home sale contingency, a real estate transaction is dependent on the sale of the buyer’s home. If it sells by the specified date, the contract moves forward; if it doesn’t sell by the specified date, the contract is terminated.
There are two types of home sale contingencies:
Sale and Settlement Contingency
This means that the buyer must get an offer on their existing home and close on it prior to closing on their new home.
This means that the buyer’s current home is under contract, but they still need to close on it before purchasing their next property.
The home sale contingency has always been sticky and frustrating. It can be frustrating as a home buyer when you find the perfect home, but securing it is entirely dependent on your current home selling first. Sellers also don’t like allowing this contingency because they may have to put their home back on the market if their buyer’s own home sale falls through.
The buyer’s offer is contingent on the home for sale having a clear title. You might wonder why a home without a clear title would be on the market in the first place. The answer: often, the seller isn’t aware of the title status.
It could be that in the process of the title company’s routine investigations, they discover something, such as an unsettled lien from a previous owner or a judgment on the property due to a divorce or unpaid taxes.
This is something that generally can be handled expeditiously, even though legal deliberations might delay the closing. It’s up to the buyer whether or not they’re willing to wait this out.
If the housing market is hot, the seller might be nervous about finding a new home at an affordable price. If they accept the buyer’s offer without having purchased a home, they might have to move into temporary housing if they don’t find a new property in time.
Thus, a seller contingency is added to the contract. This makes the potential buyer nervous, since the new contingency allows the seller to back out pretty much whenever they want.
Then, the buyer would be the one without a home to move into.
It should be stated clearly that the home sale is contingent on the seller signing a purchase agreement to buy a replacement home. Sellers should have a reasonable amount of time to find a new home, at which point, they should withdraw the contingency or cancel the contract.
Kick out clause
A phenomenon increasingly being initiated by home sellers is the “kick out clause.” In this case, the seller accepts an offer from a buyer that is contingent on the buyer selling their existing home. However, the seller adds this clause, which allows them to accept a higher, non-contingent offer if one appears.
If the kick out clause is exercised, the initial buyer can cancel the contract and be refunded their deposit, while the seller proceeds with the second buyer who had a higher offer and no home sale contingency requirement.
Contingent Meaning What?
When something is contingent in real estate, the word “contingent” means, essentially, that some event must occur for a sale to go through and close. As you’ve seen here, that could include any number of things.
When it comes down to it, most home purchase agreements are contingent on three items: the home inspection, the buyer’s mortgage approval, and a clean title.
Without a home inspection, a buyer is putting her or himself at great risk, both financially and with regard to personal safety. Loan contingencies are important because if you can’t finance the home, you’re out the deposit and maybe also a place to live. Title contingencies are almost always included in home sale contracts to ensure the seller actually owns the home and that there aren’t any outstanding liens (i.e. bills or debts) against it. Of course, now there is a better way to buy a home. If you want to buy your next home before selling the current one, we offer a simple approval process that allows you to make an all-cash offer. Get approved in minutes to buy before you sell.
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