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7 FAQs about Contingencies in Real Estate

In real estate transactions, you will hear the term “contingency” kicked around a lot. When you're buying or selling a house, it's important to not only understand what the term means but when it can come into play. Check out these seven FAQs about contingencies in real estate.

In real estate transactions, you will hear the term “contingency” kicked around a lot. When you're buying or selling a house, it's important to not only understand what the term means but when it can come into play. Check out these seven FAQs about contingencies in real estate.

The term “contingency” is used a lot in real estate. It's paramount that both sellers and buyers to understand what it means and the various ways that it is used. Failing to understand what a contingency can mean to both parties could lead to some serious problems.

Working with a real estate agent is one of the best ways to avoid confusion.

But to start building your knowledge base, here are seven answers to FAQs about contingencies in real estate.

What is a contingency in real estate?

A contingency in real estate is basically a condition that must be met by either the buyer or the seller before the transaction can continue to the next step. There are different types of contingencies that you might run into throughout the process.

Keep in mind that contingencies are placed in a contract to protect both the buyer and the seller. If the contingencies aren't meant, it could breach the contract and the transaction might fail to close altogether. It's very important that your seller's agent explain contingencies to you in detail before you sign anything so that you understand both your's and the potential buyer's responsibilities and deadlines.

What is an example of a contingency?

A common contingency you might run across is a mortgage contingency. This contingency is placed in the contract when the buyer makes an offer on a house but hasn't yet got financing approved. The mortgage contingency clause basically states that if the buyer cannot get a loan with specific terms within a certain period of time, the buyer can back out of the deal and have the earnest money deposit refunded.

What is a contingency offer?

A contingency offer means that the buyer has made an offer and the seller has accepted but the closing sale cannot be transacted until certain conditions are met. These conditions may have to do with the mortgage, the sale of the buyer's current home, the appraisal, or the inspection.

For example, for home buyers who have made an offer and given their earnest money deposit, an inspection contingency protects the buyer in case something is revealed that is a dealbreaker for the buyer. A buyer can then try to negotiate repairs with the seller or back out of the transaction altogether and is entitled to a refund of the earnest money deposit.

Should I accept a contingent offer on my house?

You may have no choice. A good buyer's agent would never advise a buyer to waive an inspection contingency, for example. In addition, if the buyer needs financing, an appraisal contingency is critical to. If an appraisal contingency is waived and the lender's appraisal comes up with a lower price than the offer on the house, the buyer is on the hook for the rest.

That being said, you do have a choice as to whether to accept an offer tied to a contingency involving either financing or the sale of a buyer's house first. It's better, as a seller, to deal with buyers who already have a mortgage pre-approval then those who are waiting for financing or for their own house to sell.

What does it mean when a house is contingent?

When a house is referred to as a contingent sale, it simply means that an offer has been made on the house and accepted by the seller, but the contingencies in the contract have to be met before the sale can go through. During this time, the seller cannot deal with any other buyers unless the contingencies in the contract have not been met and the buyer backs out.

A seller can, however, entertain other offers and, under certain circumstances depending upon the contingency and whether there is a kick out clause written in the purchase agreement. You can also enforce a notice to perform on the buyer with the contingent offer which asks the buyer to remove a contingency within a certain period of time. If the buyer fails to do so, then the seller can proceed with a different buyer.

Can you still make an offer on a house that is contingent?

You can, but it's best to find out from your buyer's agent what the contingencies are. For example, there may be a contingency giving the buyer time to sell their house. If they don't sell their house within the given time and the deal falls through, your agent will be able to track this information. Or, the contingency could involve the buyer's financing. If the other buyer doesn't get proper financing in a given time period, you may get lucky.

You should understand that your offer is worthless unless the contingent contract is released. Your offer would be considered a backup offer. You may be in for quite a bit of a wait to find out if the contingent offer goes through. You'll also want to make sure that you are the only backup offer. Being backup offer #10, for instance, is probably a waste of time.

How does buying a house on contingency work?

Buying a house on home sale contingency generally means that the purchase of one property is contingent upon the sale of another. You want to buy a house, for instance, but you haven't sold yours yet. In this case, you can make an offer to the seller and ask them if they are willing to consider an offer contingent on the sale of your house.

Should the seller agree, the seller can take their house off the market and wait for yours to sell, or the seller can include a kick out clause in the contract which allows them to send you a notice to perform if they receive another offer. Then you have a given time period, which could be either 24 hours or several days, to sell your house.

If you're selling your house and considering accepting contingent offers or a buyer drawing up contingencies in a contract, make sure you are doing so with the guidance of an experienced agent who is an expert in their local market. Clever Partner Agents are the best in their local markets and can save you money buying or selling a home. Find a Clever Partner Agent in your area today.

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Reuven Shechter

Reuven Shechter is the Outreach Coordinator at Clever Real Estate, the free online service that connects you with top real estate agents to help save on commission. He spreads the word about Clever, disseminating studies to journalists and developing relationships with media outlets. Reuven is passionate about investing in real estate and creating lasting success for families. His writing has been featured in Max Real Estate Exposure, Leverage Marketing, and more.

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