What is a contingent offer?
Good question. When you buy or sell a house, you will likely hear the words contingent offer and contingency often.
A contingent offer is a common type of offer—very common. According to a survey from the National Association of REALTORS, 76 percent of homes sold in January 2018 had buyer contingencies attached. But what is a contingent offer? It means the buyer has put an offer in on a house—with at least one caveat.
The final sale is contingent on certain requirements being met. When a buyer puts in a contingent offer, they are saying to the seller, "I want to buy this house, however…"
How Contingent Offers Work
Buyers usually use contingencies into a real estate purchase agreement so that they can back out to protect themselves if something goes wrong during the sale. In these instances, the buyer can walk away without losing their earnest money deposit.
On the other hand, a contingent offer can work to the benefit of the seller as well. They can continue to market the house and accept other offers with the partial peace of mind that may come with having at least one offer on the table already.
Is a Contingent Sale the Same as a Pending Sale?
You may occasionally hear "contingent sale" and "pending sale" used interchangeably, but they are, in fact, very different. When a sale is pending, it means that both parties are satisfied and are moving forward with the sale.
On the other hand, if you're a prospective buyer and you see a house listed as active contingent while looking at properties, you should still consider making an offer, because that means certain requirements have not yet been met.
Types of Contingent Offers
There are a few different contingency types. Here are the most common.
An appraisal contingency means that the purchase of the home will only proceed if a third-party appraisal of the home is successful. A successful appraisal means that the fair market value of the home is equal to or greater than the seller’s asking price. Buyers use this contingency to make sure that a property is worth a minimum amount in the market.
If the property is appraised for less than the asking price, the buyer can either try to negotiate with the seller or they can terminate their offer to purchase without losing their earnest money.
Home Inspection Contingency
A home inspection contingency protects the buyer just in case the home inspector finds something majorly wrong during their rounds. This could be anything from a cracked foundation to mold to annual flooding.
If the inspector finds an issue, the buyer can ask the seller to fix the issue or they can back out.
It is very rare (and inadvisable) to waive a home inspection contingency—that is, as a buyer, you should definitely insist on having an inspection done.
Mortgage Approval Contingency
This contingency makes sure that the buyer is able to secure financing before officially purchasing the home. It says, "I want to purchase this home. I just need to lock down a mortgage first." This way, if the bank doesn't agree to finance the property, the buyer isn't stuck owning a home they cannot pay for.
Home Sale Contingency
A home sale contingency clause actually has two subcategories.
Sale and Settlement Contingency
The first is a sale and settlement contingency. This means that the buyer must sell their existing home before they are able to purchase a new one. By including it, the buyer is essentially saying, "I want to buy this house; however, I just need to make sure that I can sell the one I already own first."
A settlement contingency means that the buyer’s current home is under contract but that they just need to wait until after the closing to proceed with purchasing their next property.
When a seller receives either type of home sale contingency offers, they have two options:
- The seller can remove the property from the market and wait for the buyer to sell their existing home.
- They can accept the contingent offer but still keep the property on the market. In the event the seller receives a better offer during this time, they need to provide the buyer with a 72-hour first-right-of-refusal notice to perform.
Notice to Perform
When a buyer receives a notice to perform, it means they have 72 hours to finish a task outlined in the purchase contract.
For the buyer, the tasks might be something like:
- Depositing earnest money
- Submitting a loan pre-approval letter
- Providing proof of funds to close escrow
- Signing and returning disclosures and reports
If the seller receives a notice to perform, they might need to, for instance:
- Deliver the results of the pest inspection
- Hand over Homeowner Association documents
- Provide proof of repairs
Although the notice to perform is typically called the "72-hour clause," the actual amount of time can be more or less depending on what was negotiated in the original contract.
(Typically, weekend days and holidays are not included in the 72 hours, but this should be clarified in the contract.)
Contingency Tips for Buyers
If you put in a contingent offer on a home (and that offer is accepted) but the seller receives a better offer, the seller usually offers you that first right of refusal where you’re given 72 hours to make a choice to prevent the existing purchase contract from falling through.
If the issue is with financing, you can apply for a bridge loan while you wait for your final mortgage approval to come through. Or, you can borrow a down payment from family or friends.
If you were waiting to sell your home before buying but you have a good feeling that your home will eventually sell, you can simply remove the home contingency.
If you are a buyer and would like to make an offer on an active contingent property, you need to talk with your Realtor about exactly what the current offer is contingent upon. After that, you can decide if you want to make an offer known as a "backup offer." Your offer could only be considered for acceptance if the current contract falls through.
Contingency Tips for Sellers
Contingent offers typically benefit the buyer. Sellers are more apt to accept a contingent offer in a buyer’s market when the home has been on the market for a while.
Accepting a contingent offer from a buyer can be a little bit like gambling: You have to bet that what the buyer wants to happen, will happen in order for the sale to go through. Your Realtor can help you determine the likelihood of the contingencies being completed on time and the sale proceeding.
You can also accept another offer while in this active contingent period. However, as the National Association of REALTORS states, your Realtor must disclose your previously accepted contingent offer to any other buyers' agents.
Your Realtor can also help you decide on alternative options, like proposing a longer escrow instead. This will allow you to keep the earnest money (instead of returning it to the buyer) if things fall through.
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