Purchasing Contract: What Does Contingent Mean in Real Estate?
December 7th, 2022
A contingent property means that there are some conditions attached to the sale. This could mean anything from meeting specific requirements to passing a background check. If you buy a home without knowing exactly what you're getting yourself into, you could end up losing money.
Contingency clauses are common in real estate deals. They protect both sides of the transaction. The buyer doesn't want to find out later that the seller didn't actually take care of something important. On the other side, the seller doesn’t want to get stuck in the sales process for too long, and lose value of their property.
Common Real Estate Statuses
When a seller puts the house on the market, that house can go through several statuses before actually getting sold. Listed houses go through stages of the selling process, but the one that’s the most interesting for the buyer is an active listing.
Active listings are opened for offers, which means that the seller did not accept any offers and that it is open for showings. You can get all information about this property as a buyer and make an educative offer.
Between active and sold, there are many different combinations of statuses. However, what many people wonder about it is what does contingent mean in real estate and how it differs from a pending listing.
Pending Listing
A property listed as pending has passed all clauses of the sales agreement and is approaching closing. However, there is still a chance that the sale will fall through.
Take-backs are common during real estate transactions. If you find yourself in this position, it might mean that the buyer or the seller wants to renegotiate some terms before the transaction closes. That’s why the house is not sold until everything is settled and the title is transferred to the buyer.
The term “backup offer” refers to an offer that is contingent upon another offer falling through. For example, let’s say that you want to sell your home for $300,000. You receive an offer of $320,000. However, the buyer backs out of the deal because he/she doesn’t like the neighborhood. So, you make a backup offer of $310,000.
If the original offer fails to close, you still get what you wanted—the home sold for $310,000. Backups give sellers a way to negotiate down the asking price without losing the property entirely.
The main difference between pending and contingent is the fact that a pending listing is much closer to closing than a contingent. Let’s expand on that in the next chapter.
Contingent Listing
When a seller accepts the offer, they and the buyer sign a purchase contract or sales agreement. This document can allow both of them some wiggle room to negotiate other terms and back out of the sale if something undisclosed arises.
The wiggle room is created by the contingencies that buyers and sellers put in the contract. Those clauses create conditions that each party must meet in order to proceed with the sale. Property is in the contingent status in the timeframe during which the signatories meet the contingencies.
When a sale is on hold due to contingencies, you should consider listing your property as a contingent selling listing. This lets potential buyers know that you’re open to offers but with conditions.
If you want to sell your home fast, you should remove contingencies before putting your house back on the market. Once you do this, you’ll likely receive multiple offers and close faster than if you hadn’t removed the contingencies.
What Does Contingent Mean In Real Estate?
A contingency clause is a term used in real estate transactions where both parties agree to certain terms and conditions before signing a contract. These clauses are often included in contracts because it helps protect both sides from unforeseen circumstances.
There are many different types of contingencies that can be negotiated in real estate deals. Which item will be included in the contract is up to the sellers and buyers who are signing it.
However, if you are a buyer borrowing money for a property, most likely that a mortgage contingency will be included in the contract. Similarly, lenders will probably require a title or inspection contingency just so that there are no unresolved issues and liabilities on their investment.
Home Inspection Clause
The home inspection contingency is an important clause in the sales contract because it allows the buyer to stop the sales process in case any major repairs arise. This contingency clause is one way to protect yourself during negotiations.
If you are purchasing a home that needs work, it is important to ask about the seller’s inspection policy. This is especially true if there are problems with the property, such as termites, mold, water damage, etc.
Buyers often waive inspection contingencies in competitive markets. In fact, most sellers will conduct an inspection before listing their properties. However, buyers don’t trust blindly the pre-inspection results as they could be tampered with by the seller.
Here are some things to consider when a buyer insists on inspection contingency:
- How long will the inspection take?
- What happens if the buyer finds something wrong with the house?
- Will the seller pay for repairs?
Mortgage or Financing Contingency Clause
A mortgage contingency clause or a financing contingency allows the buyer to back out of the sale in case of not getting approved for a loan without losing their earnest money. Earnest money is in an escrow account and is usually 10% to 20% of the purchasing price.
Buyers usually get prequalified and/or preapproved for a loan. Prequalifying is not the same thing as preapproving. Preapproval means more to the buyer because, unlike prequalifying, it doesn’t just give them the ballpark estimate - it provides the concrete answer on how much can they borrow and under what terms.
Still, neither preapproval nor prequalification guarantees that the buyer will get the loan. The financial situation of the buyer can change in the meantime, or the market can shift. For example, if the mortgage rate increases significantly in the meantime - a buyer will not be able to afford the same loan.
Mortgage contingency gives them a way out of the sale, without losing earnest money. So they can search for the house in their new, adjusted budget.
Appraisal Contingency
A home appraisal contingency allows the buyer to know what the true market value of the property is before signing the contract. This clause protects both parties from getting stuck with a high or low valuation during negotiations.
The seller and buyer agree on a price based on the home’s current market value. If the home appraises for less than the agreed-upon amount, the lender will require a re-negotiation of the loan amount
Title Contingency Clause
A title contingency helps to protect buyers against any possible future claims. There could be issues with mortgage loans, liens, encumbrances, etc. These things need to be cleared up prior to closing. This protection gives you peace of mind knowing that if anything does come up, it won't affect the sale.
Additionally, you can protect yourself by signing a warranty deed that obligates the seller to take responsibility for any potential issues regarding the property's title.
Can You Make an Offer on a Property in Contingency Status?
During your search through listings, you might find that many of them carry labels that are even more complicated than just “contingent” or “pending”. That is because there are a few contingents subcategories, depending on how open the seller is to new offers.
The most common statuses are Contingent: Continues to Show and Contingent: No Show. The first one signifies that the seller is open to backup offers - maybe they suspect the buyer will not get approved, or other contingencies might take too long. If the contingent listing is a no-show - the seller is confident that the sales process has a clear path to the closing.
You have the right to make an offer on any property you want, but you should consult with your agent before doing so. It is best not to spend your resources and time on making an offer that will never bring you a house.
How Long Can a Property Be Contingent?
A mortgage contingency period typically lasts anywhere from 30 to 60 days. During this time, you agree with your lender to the terms of the loan, including interest rates and payment amounts. This gives you time to secure financing and make sure everything goes smoothly once you close on the purchase.
Inspections are another part of buying a house; however, it depends on what type of inspection you want. A pre-listing inspection is done prior to listing the property for sale. An open house inspection happens during the open house event itself. And a final walk-through inspection takes place after closing.
Some sellers limit the period for meeting the finance contingency, and some buyers limit the period during which repairs must be completed. Each sales contract allows for parties to put their own clauses and conditions. However, properties are, on average, listed as contingent for 60 days.
What Happens to the Earnest Money?
Earnest money is the amount of money the buyer transfers to open an escrow account when the sales contract is signed. The escrow holder is responsible for more than just holding the money until the closing. Rather, they are following closely the resolution of contingencies, dealing with repairs, and title issues - and ensuring that everything goes according to the sales agreement.
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