What Does Contingent Mean When Buying a House?
Navigating the world of real estate can often feel like trying to understand a foreign language. Among the number of terms that potential homebuyers will encounter is “contingent.” But, what does contingent mean when buying a house, and why is it so important to understand? Let’s dive in.
Contingent Meaning in Real Estate
Defining “contingent” in real estate
Embarking on the journey to owning a home can be thrilling, but that rush of excitement often comes with a mix of complex jargon that may seem overwhelming. One such term is “contingent” — a key concept that often shows up in real estate listings. When it comes to the real estate industry, a “contingent” property refers to one where the seller has agreed to the buyer’s offer, but the conclusion of the sale still hinges on certain criteria — the contingencies — being fulfilled. These contingencies play a pivotal role in the home buying journey, as understanding what “contingent” means can help both buyers and sellers navigate the process more effectively.
Different types of contingent listings carry different implications for the sale process. For instance, a short sale contingent signifies that the home is being sold for less than the mortgage owed, while a change from active to contingent status suggests that the seller has accepted an offer, but the deal is not yet finalized. The sale is pending until all the contingency criteria are satisfied. Using a multiple listing service can help buyers and sellers navigate these various types of listings more efficiently.
Contingent Definition
A contingent sale in real estate implies a sale that’s under a conditional agreement. While the seller has agreed to the buyer’s offer, the transaction is yet to be completed. The sale hinges on specific conditions, termed as contingencies. These contingencies can vary widely and are typically conditions that must be met for the sale to proceed. Some common contingencies include:
The buyer obtaining financing
The buyer selling their current home
The completion of a home inspection
The resolution of any title issues
The approval of any necessary permits or inspections
It’s important for both buyers and sellers to understand and carefully consider the contingencies in an agreement, especially those related to the agreed upon purchase price.
Common contingencies include the buyer securing financing, a satisfactory home inspection or the home sale contingency of the buyer’s current home. If these conditions are not met, the buyer has the right to back out of the sale without being penalized.
Importance of Contingencies
Contingencies play an important role in real estate transactions. Acting as a protective measure, they empower both buyers and sellers to retract from a deal if certain pre-established conditions aren’t met. Contingency clauses in real estate contracts typically serve to safeguard the buyer. They spell out specific conditions that, if not fulfilled, allow the buyer to legally terminate the contract.
These clauses can encompass a wide range of situations, such as:
Safeguarding the buyer’s earnest money deposit
Ensuring fulfillment of specific conditions like home inspections and appraisals
Obtaining financing from lenders
Managing home sale contingencies
Common Contingencies in Home Buying
Woman examining home buying contingencies
A “contingent” property means that while the offer made on it has been accepted, the completion of the sale is reliant on one or more contingencies. A contingency in real estate can vary and is dependent on the buyer’s specific circumstances and needs.
Finance contingency is a common type of contingency. It provides the buyer a set time frame to procure a loan or other financing to buy the property. If the buyer fails to secure financing within this period, the contract may be terminated, and the buyer may receive a refund of their earnest money deposit. This contingency protects the buyer from losing their deposit if they are unable to secure financing for the purchase.
Appraisal Contingency
An appraisal contingency is another frequent type of contingency offering protection to the buyer. It allows the buyer to exit the contract should the appraised value of the property be lower than the buying price. This is a critical contingency because lenders typically only give funds based on the appraised value of the property.
If the appraisal is lower than the purchase price, the buyer would need to cover the difference out of pocket, which may not always be possible. If a buyer can’t cover the shortfall, they can renegotiate the purchase price with the seller or back out of the deal altogether. Sellers can minimize the risk of low appraisals by thoroughly vetting offers and understanding the buyer’s financial position.
Inspection Contingency
An inspection contingency grants the buyer a set period to have the property inspected. This home inspection contingency enables the buyer to observe the home’s condition, ask for repairs or a price cut, or even withdraw from the deal in case of substantial issues. A home inspection can uncover potential issues that may not be immediately visible, such as structural issues, plumbing or electrical problems or other costly repairs.
If the anticipated repair expenses surpass a predetermined threshold, the buyer can back out of the contract without incurring any penalties.
Mortgage Contingency
A mortgage contingency shields the buyer in case they fail to secure a mortgage within a designated period. If they can’t obtain financing from a mortgage lender, the buyer has the choice to retract from the contract and get back their earnest money deposit.
The loan contingency period is a specified timeframe during which the buyer must obtain final approval for their loan. If the loan is not approved by the end of this period, the buyer can back out of the contract without losing their earnest money deposit.
Title Contingency
A title contingency offers protection to the buyer, permitting them to withdraw from the contract if there are complications with the property’s title like liens or ownership disputes. These issues can arise from a variety of situations, such as a previous owner not paying their property taxes or a contractor placing a lien on the property due to an unpaid bill. If such issues are found during a title search, the buyer has the right to terminate the contract while also keeping their earnest money deposit.
Different Types of Contingent Statuses
Real estate agent discussing different contingent statuses
Different types of contingent statuses in the real estate industry include:
Contingent: Continue to Show
Contingent: No Show
Contingent: With Kick-Out
Contingent: With No Kick-Out
When a property is listed as “Contingent: Continue to Show,” it means that the seller has accepted an offer with contingencies, but is still showing the property to other potential buyers. On the other hand, when a property is listed as “Contingent: No Show,” it means that the seller has accepted an offer with contingencies and is no longer showing the property to other potential buyers.
Contingent: Continue to Show
A “Contingent: Continue to Show” status is beneficial for both buyers and sellers. For the seller, it allows them to continue to market their property to other potential buyers while waiting for the original buyer to fulfill their contingencies. However, there are potential risks for sellers, including the possibility of the initial buyer failing to sell their own home, which could result in the seller not being able to finalize the sale of their property.
Contingent: No Show
When a property is listed as “Contingent: No Show,” it indicates that there is a strong offer on the table and the seller is no longer showing the property. This suggests that the sale is likely to proceed to closing.
This scenario can be challenging for prospective buyers who are interested in the property, as their options are limited unless the existing deal falls through.
Contingent: With Kick-Out
A “Contingent: With Kick-Out” status means that the seller has the right to “kick out” the original buyer if a more favorable offer is presented, due to the presence of a “kick out clause.” This is useful when the original buyer’s offer is contingent upon the sale of their own home. If a new offer is presented that does not have this contingency, the seller can kick out the original buyer and accept the new offer.
Contingent: With No Kick-Out
Conversely, a “Contingent: With No Kick-Out” status indicates that the seller has accepted an offer with contingencies but is not setting a deadline for those contingencies to be met. In this scenario, the seller must wait for the buyer to fulfill the contingencies without the ability to accept other offers, which could lead to a situation where contingent offers fall through.
This can potentially lead to an extended selling process if the buyer is unable to meet their contingencies in a timely manner.
Contingent vs. Pending: Key Differences
Sale pending real estate sign
Although “contingent” and “pending” are often used interchangeably, their subtle differences offer valuable insight into a property’s status. A property is considered “contingent” when the seller has accepted an offer, but the completion of the sale is dependent on certain conditions or contingencies being met. On the other hand, a “pending” property is one where the seller has accepted an offer, and all the contingencies have been met.
While both contingent and pending statuses indicate that a property is under contract, the key distinction lies in the likelihood of the sale going through. If a property is listed as contingent, it means that there are still conditions that need to be met before the sale can be finalized. This means that there is still a chance that the sale could fall through.
On the other hand, a pending status typically indicates that all conditions have been met, and the sale is just awaiting the final closing.
Contingent Status
A property listed as contingent denotes that while the seller has agreed to an offer, the sale still rests on the fulfillment of specific conditions. This contingency could be anything from the buyer securing financing, the property passing an inspection or the buyer selling their current home.
The contingent status allows for a level of flexibility and protection for the buyer, as it gives them the option to back out of the sale if the contingencies are not met.
Pending Status
A pending status implies that all contingencies have been fulfilled, with the sale now awaiting the closing process. This means that the buyer has met all the conditions outlined in the contract and the sale is expected to close without any issues. Once a property is listed as pending, it is generally considered off the market, and the seller will typically not entertain other offers.
Making an Offer on a Contingent House
A house listed as contingent isn’t necessarily off the market. Often, sellers remain open to backup offers in the event of the original deal not materializing. If you find a contingent property that you’re interested in, it’s important to work with a real estate agent to understand your options.
Backup Offers
A backup offer is an offer made by a potential buyer on a property that is already under contract. If the original deal falls through, the seller can accept the backup offer without having to put the property back on the market.
This can be beneficial for both the buyer and the seller, as it provides a safety net for the seller and a chance for the buyer to secure a property that they’re interested in even if it’s currently under contract.
Working with a Real Estate Agent
While making an offer on a contingent property, it’s a good idea to work with a real estate agent who can steer you through the process. They’ll help you understand the specific contingencies involved and advise you on the best course of action. They can also help you negotiate the terms of your offer to ensure that your interests are protected.
Handling Contingencies as a Buyer
Buyers looking over potential contingencies
Effectively managing contingencies is a key aspect of the home buying journey. It involves:
Understanding the contingencies that are common in your local market
Knowing your rights and obligations under the contract
Working with your real estate agent to negotiate the terms of the contingencies
It’s also important to understand the potential risks involved in negotiating contingency clauses and to be prepared to handle any issues that may arise.
Negotiating Contingency Clauses
In terms of negotiating contingency clauses, it’s worth talking to a real estate agent who can lead you through the process. They can go over what specific contingencies mean in real estate, especially those that are common in your local market, advise you on the best course of action and negotiate the terms of the contingencies on your behalf.
Addressing Contingency Issues
Effectively tackling contingency issues can contribute to a seamless and successful real estate transaction. This involves working closely with your real estate agent and legal advisor to navigate any issues that may arise and to ensure that your interests are protected. Collaborating with a professional can go a long way toward cutting some stress out of the home buying process.
Wrapping Up
Understanding the term “contingent” and how it applies in the real estate industry is crucial for anyone embarking on the home buying journey. Contingencies provide essential protection for buyers, allowing them the flexibility to back out of a sale if certain conditions aren’t met. But they also introduce a level of complexity into the home buying process, making it even more important to work with an experienced real estate agent who can guide you through the process and answer any questions that might pop up.
As always, feel free to reach out if you need help tackling contingencies. I’ve helped simplify contingencies for dozens of clients and can do the same for you. Give me a call at 773-415-4500 or visit my contact page!
Questions From My Clients
Can you put an offer on a house that is contingent?
Yes, you can put an offer on a house that is contingent, and it can give you priority if the original deal falls through.
Can a seller accept another offer while contingent?
No, a seller cannot accept another offer while the current offer is contingent. This protects the current buyer from being "kicked out" unless they fail to meet their contingencies.
What is difference between pending and contingent?
Pending means the sale process is underway because all contingencies have been met, while contingent means the seller has accepted an offer but certain conditions still need to be fulfilled. A buyer may be able to make a backup offer on a contingent property.
Can a seller back out of a contingent offer?
Yes, a seller can back out of a contingent offer if the buyer fails to meet the specified contingencies or doesn't fulfill their obligations under the contract. This gives the seller a legal basis to withdraw from the agreement.
What does contingent in real estate mean?
In real estate, "contingent" means that an offer has been made and accepted, but before the deal is complete, some additional criteria must be met. This term signifies that the sale has not been finalized.