Learn more about common contingencies in real estate and how they can affect the buying processes.
Buying and selling a home often requires a dictionary as you navigate a new litany of terms, each describing a crucial step in the process. In real estate, a contingent offer has a meaning all its own—one that can make or break a deal.
It is a common misconception that once you are under contract; you are going to close with that buyer and seller—no matter what. This is absolutely false if there are contingencies in your contract.
This article examines the definition of contingency, how the status relates to other terms in real estate, and how contingencies can affect the outcome of a potential sale.
What Does Contingent Mean?
The word “contingent” means subject to change, but in real estate, there’s a little more to it. “Contingent is a legal framework in real estate contracts.
Contingent means certain events or conditions must occur for a real estate deal to move forward.
Typically, contingencies center around a buyer’s financing. For example, it is common to see mortgage contingency clauses in contracts. This means the buyers are only obligated to purchase a home if they are able to secure a mortgage to cover part or all of the home’s purchase price.
Usually, contingent offers have an expiration date, which compels the buyers to secure their mortgage or alternate financing before such date.
What Does ‘Under Contract’ Mean?
If you’re browsing other home listings online, you may have seen the term “under contract,” listed on various homes. This status can refer to homes with contingent offers in place. Under contract means a purchase price has been agreed to and a contract for sale has been signed by both the buyer and seller. This does not necessarily mean that the home will ultimately be sold since there are often contingencies listed in the contract. When a home is under contract with contingencies, the next step is to resolve those contingencies so that the home can be listed as pending. Pending status indicates that the contingencies have been met and that the buyer is satisfied with any remedies that have been required of the seller. It also may indicate that the buyer’s property has sold and that obstacle to closing has been removed.
What Does ‘As Is’ Mean in Real Estate?
When a home is being sold as is, some contingencies can’t come into play. Instead of contingent, sometimes a property is listed as is. This means a buyer takes on a property in its current form and will accept the sale of the home without any contingencies,” she says. “In this situation, a buyer may still conduct a home inspection. However, the inspection results will be for information purposes only and not for negotiation purposes.
Types of Contingencies
Most contingent offers involve finding financing for the home, but there are other reasons.
Forms and Financing
Typical contingencies include forms and financing. There are different forms that play into timelines and the ability for a buyer to potentially cancel a contract. States differ dramatically on the process. Financing contingencies allow the buyer a certain period of time to formally obtain financing.
Home Inspections
Another common contingency is home inspections, the buyer to hire someone to inspect the home’s condition and safety.
If major issues come up as a result of a home inspection, then a buyer has a few options. First, the buyer can ask the seller to remedy the issues before the closing date. Second, the buyer can ask the seller for a credit—a reduction of the purchase price—to accommodate the required fixes and remedy the situation after the home’s purchase. Finally, the buyer can walk away depending upon the scope of the contingencies.
Hubbard Clause
The Hubbard Clause, which many current homeowners have to take advantage of when they try to sell while buying, is another common contingency.
This framework protects the buyer as it establishes that the buyer will only purchase a home after they have sold their current home. A time frame is typically established for the buyer to sell their current home and if the buyer does not sell their home by the agreed deadline, the purchase will not move forward. In the meantime, the seller can continue to market their home and even accept another offer after notification and refusal by the first buyer.
Insurance Availability
Many offers are contingent upon a buyer being able to secure insurance for a home. This can be jeopardized if a home is in a dangerous flood zone or prone to damage from other natural disasters. It can also be the case if a home has had unpermitted work done.
If a seller has added bathrooms or living spaces on their own without a permit, those may be deemed uninsurable. Ask if the work was permitted, and be sure to verify independently of the seller’s answer.
How Contingent Offers Affect Sales
Contingent offers are common, but when sellers have control of the market, as they did post-pandemic, these offers might be less attractive. That’s because contingencies can be roadblocks to a closed and final deal.
Contingencies slow down the closing process, so a seller may prefer a buyer with one or no contingencies over a buyer with multiple contingencies, especially if the seller is on a strict timeline or has had their home on the market for a while,” A seller might also choose to not even accept a contingent offer in the first place, in fear of the contract falling through.
Who Benefits from Contingencies?
Contingencies benefit buyers more than sellers. Contingencies give buyers time to secure financing for a home, thoroughly investigate a property, and understand the risks they are taking on with a home’s purchase.
Buyers should insist upon contingencies, but in a seller’s market, buyers could be pressured to limit those contingencies to health and safety concerns for the home. In a seller’s market, where buyers are competing for limited properties, it’s less likely that a seller will entertain extreme contingencies that could jeopardize an otherwise smooth sale.
