What Does Contingent Mean in Real Estate? (Video & Infographic)
Posted by Dan Boyle on Thursday, April 29th, 2021 at 2:23pm.
Searching for a home on the market can be an overwhelming experience, especially if its your first time. You're excited about new beginnings and yet most likely worried about the process as well. The process can be a little confusing. There are new terms to learn - like "contingent."
While searching for your next house, you think you found the perfect one. Then, you happen to notice that it has been listed as "contingent." What does that even mean? We're here to guide you through just what contingent means in real estate. We have a complete overview to fully inform you and give you the savvy you need to navigate your next real estate purchase.
Let's Define Contingent Real Estate
First things first, let's take a broad look at what the word contingent means in real estate. Contingent means that completion of the real estate sale "hinges" on something. For example, when you see a home noted as contingent, it means it is under contract, but certain things must happen for the deal to close. Should these things fail to occur successfully, either the buyer or seller may have the right to cancel the contract.
In other words, an offer has been made and accepted, but closing can only take place after specific stipulations have been met. These contingencies, or requirements, to complete the sale could be any number of things.
While contingencies aren't often listed publicly, they are usually related to mortgage approval, the appraisal, or a home inspection. Ultimately, a contingency contract gives the potential buyer an "out" if they can't perform or the home's value is less than the price. When a contingency is not met or passed, the buyer can cancel the contract and have their deposit returned.
Contingent Vs. Pending
A contingent sale is not the same as a pending sale. Although they appear to be interchangeable in many parts of the country, they have subtle differences. "Pending" most accurately describes a contract that is heading toward closing without contingency "obstacles" standing in the way. Both parties are bound, and "outs" no longer exist.
If contingencies are "removed" by fulfilling them or waiving them, the contract can be classified as "pending." The most significant difference between the two is that while a sale is contingent, it can still be actively shown and is still an active listing.
When a sale moves to pending, it is no longer an active listing. Pending simply means that legal work is in process. There are no further stipulations to meet apart from completing the paperwork criteria and officially signing all of that paperwork to close the sale.
A contract can be made contingent on anything. One could have drafted an offer contingent or "hinging on" winning the lottery. While most sellers would likely reject such an offer, other contingency offers are commonly accepted.
Here are the most typical.
● Home Sale Contingency
● Appraisal Contingency
● Financing or Mortgage Contingency
● Inspection Contingency
There are times that something else might apply, but these categories pretty much encompass the total picture of real estate contingencies. Just about anything that might lead to a contingency could fall into one of these four areas.
Now, let's talk about each of these in more detail.
Home Sale Contingency
In this case, a contract is made contingent on the buyer selling another home. Many buyers will make an offer to buy their next home before selling the one they currently own. They need to sell their current home to make it all work.
Sometimes the selling process moves quickly. In a hot market, sellers may be willing to accept an offer contingent on the sale of the buyer's home. However, in cold markets, this kind of contingency presents a great deal of uncertainty, and most sellers decline. In extremely hot markets, buyers are often afraid to sell their home ahead of contracting to buy their next one for fear of not having a home at all.
It's a small window of opportunity to get the first home sold and wrap up purchasing the new home, all within a tight timeframe. Having a home sale contingency allows the buyer to withdraw if it looks like their existing home may not timely sell. The contingency will enable them to let go of their offer without any monetary or legal ramifications for doing so.
An appraisal contingency is precisely as it sounds. Ultimately, the sale of the home hinges on the appraisal value of the home. This contingency is pretty standard across the board. An appraisal contingency protects the buyer from paying more for the house than it is worth.
The key here is that the home needs to appraise for at least the contract price. If the appraisal is lower than the contract price, the buyer can request a lower price or even ask the seller to pay the difference in some cases.
Alternatively, if the buyer and seller can't reach an agreement, the buyer can walk away from the deal with no repercussions for doing so.
Financing or Mortgage Contingency
Again, this is another almost self-explanatory contingency. With this type of contingency, the sale hinges on the approval of financing to make the purchase. This contingency protects the buyer in the typical scenario in which the bank fails to approve the loan.
The vast majority of home buyers must finance their purchase, so this contingency is incredibly popular. Even if a buyer comes to the table with a pre-approval in hand, they still need to complete the financing process to accommodate the purchase.
A lot can happen from offer time to closing time. Having a financing or mortgage contingency protects the buyer should something go awry, leading to either the financing not being approved.
From illnesses to job changes and everything in between, the financing contingency protects the buyer should financing not work out in the end. Should financing be declined, the buyer can seek financing alternatives or walk away without legal repercussions or loss of their deposit.
The final most common contingency that we are going to discuss is a home inspection contingency. Home inspection contingencies protect the buyer if a home inspection reveals costly issues.
In an inspection, they do not necessarily go digging for issues, but they do look specifically for potential problems with plumbing, roofing, structure, electrical, and anything else significant. The focus of an inspection is to make a buyer aware of items that will need repair or that might affect the safety of the occupants of the value of the property.
Inspections may also include radon testing, mold checks, well water testing, and lead paint testing.
If an inspection does show cause for concern, an inspection contingency allows the buyers to request specific issues be fixed or request an adjustment in price. Adjustments are usually in the form of a credit at closing. If the buyer and seller can't reach an agreement, the buyer can walk away from the deal with no legal ramifications and receive their earnest money deposit back.
In many markets, a home's contingent status should not detour buyers. It usually means real estate agents can still show the property to potential buyers. When a home is contingent, it is still active, so other interested people can also make offers.
When you make a contingent offer, you leave the home open for others, and there is always the possibility someone will make an offer that is more attractive to the seller than yours.
A contingent offer allows the buyer to have some protection so they won't lose money if something isn't right or something goes wrong in the process. The sale will often proceed as usual through all of the steps, but it will not change to a pending sale until the contingencies have been met or agreed upon, keeping the listing active for others to make offers as well.
Making a Contingency Offer
The contingency is simply a clause included in the formal offer. The common contingencies are usually already denoted in the real estate contract. Your Realtor will merely check a box to make the clause part of the offer. When the seller receives your offer, they will either accept it, reject it, or make a counteroffer with contingencies noted.
Often with contingency offers, the seller will decide to accept the contingent offer and take their property off the market while the closing process plays out.
Alternatively, in most markets, the seller can accept the contingent offer and choose to keep their home on the market. This practice allows the seller to receive other offers and potentially kick out the contingency offer if they feel like something better or more fitting to their timeline comes along. It is vital that your agent understands "bump-out" clauses and can fully inform you.
Real estate agents or attorneys are an essential resource when executing contingency offers. FSBOs and buyers of homes sold by individuals often face problems associated with compliance with these contract terms. As a buyer or seller, you should consult with an experienced attorney or Realtor to ensure your interests are protected.
A contingency offer becomes a contingency contract when the offer is accepted. The agreement will specify the contingencies that need to be met as the process moves forward to a sale.
Simply put, a contingency contract is an agreement between parties that once all contingencies are satisfied, a sale will occur. It simply means that both the buyer and the seller have agreed upon all terms, including the contingencies. It's a contract of good faith and relays the intentions of both parties to continue.
Congratulations! Once both buyer and seller have signed the agreement, you have a binding contingency contract. The closing process then moves forward unless one party or another fails to satisfy a contingency. Otherwise, the contingency contract will remain in place, and the sale will officially occur at the "closing."
Remember, though, a contingency contract will attract attention from competing buyers. The listing might remain active on the market and open to other offers. The contingencies allow the seller to keep their options open. Consult your real estate agent to maximize your protection against losing the property.
What Does Zillow Mean by "Contingent"?
When Zillow denotes a listing as "contingent," they mean the same thing we've discussed here. When Zillow uses the term "contingent," they inform users that the sale "hinges" on one or more variables. If their listing is contingent, it's because the seller has accepted a contingency contract on the property.
With Zillow, it's harder to know where the process might be since their information is not always real-time and is often inaccurate. There are many times when it may take 48-72 hours for the information to get updated on Zillow because they rely on outside sources to update their details.
If you see a contingent listing on Zillow, know that the buyers and sellers are under contract and working to remove contingencies. If you love the property, make a "back-up" offer. The seller may be open to other offers, especially if their current contract starts to look flimsy.
What Does Active-Contingent Mean?
Many markets in the U.S.A use a term that denotes that a home is under contingency contract but that the seller is still open to showing their home and seeing other offers. They specify these listings as "Active-Contingent." It means that the seller accepted a contingent offer on the house but is actively searching for more offers.
The listing is still fully active, so agents may continue to show the property and help their clients submit offers.
Active contingent means they are working on contingencies, but the listing is active. On the contrary, in these markets, properties are often listed as "inactive-contingent" or perhaps "no-show contingent." These terms mean that the seller has chosen to take the home off the market as they work through the contingency contract with the potential buyer.
Pitfalls of Contingent Contracts
There are pros and cons to contingent contracts for both the buyer and the seller. As a buyer, if you make a contingent offer that leads to a contingent contract, it leaves you open to losing the home in certain circumstances. Since the seller may still receive and accept offers, a risk remains.
Contingent contracts are risky for sellers too. Seller's risk taking the home off the market, losing the sale, and then having to reactivate a now stale listing.
For example, if a seller accepts an offer contingent on the sale of the buyer's home, the deal could drag out for months. A buyer or a seller might get excited about the process, only for it to fall apart in the end.
The good news is that the percentage of contingency contracts that fail is relatively small compared to successful contracts. It can happen, though, which means there is an opportunity for disappointment on both sides of the contract.
How Often Do Contingency Offers Fall Through?
The rates at which contingency offers fall through are fairly low. The numbers vary with the status of the economy and the housing market. For example, when the economy dips, we are more likely to see more contingency offers and more fall through.
If you need to make a contingency offer, the statistics are certainly in your favor. Studies show that historically, failed contracts are typically less than 5%. This number has risen from a very low 1% to 4% in recent years, but the percentage remains relatively low.
Even with the rise, contingency contracts falling through is pretty rare overall. When they do fall through, it's often directly related to one of these items.
● Unexpected financial difficulties
● Home inspection findings
● Lower value than expected by appraisal
● Buyer's remorse or perhaps seller's remorse
Benefits of Making Contingency Offers
If you're wondering whether it's worth it to make a contingency offer, the answer is yes. In the end, a contingent offer is all about protecting the buyer should some unforeseen circumstance present itself.
You certainly don't want to find yourself in a lurch should you find that the home is overpriced, that there are substantial concerns from an inspection, or perhaps if your financing were to fall through. A contingent offer is a means of protection if there is any concern that something might go awry.
A contingency offer is not always necessary. However, if you are the least bit uncertain or unsure, talk with your agent and discuss the benefits in your specific situation to make an informed decision.
Contingencies are primarily protective clauses, and the majority of the time, things work themselves out during the process.
Do Sellers Have to Accept Contingencies?
When you make a contingent offer, a seller has the right to reject that offer, counteroffer, or simply accept the offer. They do not have to accept any contingencies. Are there cases where having contingencies might cause you to lose as a buyer? Absolutely.
The seller can accept contingencies, but it is not required, leaving room for negotiation or potentially complete rejection of the contingencies. If a contingency offer is accepted, the listing can remain active, which means they can "kick you out" if they receive a better offer.
As a buyer, if you are making a contingent offer, make a point to do so judiciously. You don't want to be overly aggressive with your approach. In a seller's market, being pushy and demanding might prevent the seller from wanting to work with you.
You can also make your request personal. Occasionally, buyers will include personal letters with their offers. I've heard that this has been beneficial in some cases, but you run the risk of appearing manipulative. Apply this kind of strategy cautiously.
To be clear, a non-contingent offer is one without contingencies of any kind. The offer "hinges" on nothing, including financing. It is a cash offer with no "outs" related to the inspection meaning the buyer accepts the home "as-is." Also, if the property appraises for an amount less than the contract price, the buyer still must close. In these cases, you can potentially retract your offer once the contract is in effect, but it will most likely cost you your earnest money and any other money that you had invested into the process.
Contingency Removal – Waiving Contingency
Between contract and closing, it may become necessary or advantageous to waive contingencies as a buyer. Perhaps a competing offer has come in, or maybe you are confident that your financing is absolute. There are several reasons why you might decide to risk your deposit and remove your contingency. There is some question as to whether this is wise, but it is pretty common. As a buyer, if you waive contingencies, the seller becomes confident that you will close and also becomes legally bound to close himself. The deal becomes solid.
Remember that waiving contingencies removes all your "outs," so be aware and informed before deciding.
Hopefully, you now understand the term contingent and all of its implications in real estate. If you still have questions, contact our offices. We're always happy to help. Happy house hunting!