If the nature of your job involves closing contracts regularly or you’re in a career of severe communication, you must have come across the word “contingent” quite a few times.
In common parlance, the word “contingent” (typically used with the preposition ‘on’) denotes a thing occurring or existing only if other specified circumstances are the case. Alternative terms include ‘dependent on,’ ‘based on,’ ‘conditional to,’ ‘subject to,’ and ‘determined by.’
Examples of the term “contingent” in sentences include;
- The improvement of his medical condition is contingent on his diligent administration of the prescribed meds.
- His release from police custody is contingent on him clearing his name.
- The labor unions have maintained that any proposed statutory deduction should be contingent on salary increments.
But like most words, “contingent” may take on additional meanings depending on the industry and context in which it’s applied. This post looks at the meaning of ‘contingent’ in real estate.
What Does Contingent Mean In Real Estate?
“Contingent” is a property listing status online that indicates that a seller has already accepted an offer but has decided to keep the listing active just in case the prospective buyer fails to meet certain additional conditions. In other words, contingent in real estate means the seller keeps their options open.
Although a seller has accepted an offer, they fear that the prospective buyer may not meet certain conditions outlined in the sales agreement. That’s even though the buyer might have given an undertaking (verbal, written, or otherwise) to fulfill the said terms.
However, while exploring house contingent meaning, it’s important to note that real estate transactions are not always pegged on specific additional actions the buyer must undertake. These conditions usually apply both ways.
A buyer may openly express their interest in a property but attach a rider (a contingency clause) to it. In this case, the seller must meet the buyer’s conditions before the former agrees to close the deal.
Types of Contingencies Imposed By Real Estate Sellers to Buyers
1. Mortgage Contingency
Mortgage contingencies require potential buyers to be able to secure sufficient funds by a particular date during the home-buying process. This type of contingency essentially touches on the buyer’s ability to qualify for a home mortgage loan.
The burden now rests on the buyer to put together the required amount of money to fulfill the terms of the sale. They can source the funds from traditional financial institutions or take advantage of instant loan apps, depending on how short they’re.
2. Financial Commitment Contingency
Financial commitment contingency is a condition in real estate transactions requiring a potential buyer to extend a gesture of commitment indicating they’re serious about purchasing the property. The undertaking is typically given by way of a down payment.
There’s no standard rule on the percentage of the total sale value to advance as a down payment. It can be as high as 30% or as low as 5%.
The mere willingness to pay out a certain percentage in advance is proof of a buyer’s seriousness.
3. Home Sale Contingency
If a prospective buyer is trying to purchase a residential property, the seller may require them to dispose of their current home first. The goal is to ensure the buyer has sufficient funds and a higher sense of urgency to finance the new purchase.
However, there are two ways around this contingency.
First, the potential buyer may obtain a mortgage loan to prove their financial muscle to fund the new investment. They may also request a later-than-normal closing date, giving them more time to dispose of their current house.
Types of Contingencies Imposed By Real Estate Buyers to Sellers
1. Home Inspection Contingency
Home inspection contingency means that a prospective real estate buyer will only go ahead with the transaction once a professional home inspector has undertaken a rigorous inspection of the property. The inspector would typically furnish the buyer and seller with a list of the flaws they could uncover during the process.
Note that home inspection contingency doesn’t necessarily stop a buyer from purchasing a property because it has serious flaws. Both parties (the seller and buyer) can strike a deal on resolving the problems before finalizing the deal.
This agreement would either entail the seller fixing the flaws at their own cost or factoring in the estimated repair costs in the final selling price.
2. Appraisal Contingency
It’s not unusual for real estate sellers to exaggerate the true worth of their properties. The idea is to dupe unsuspecting buyers into paying more than the property’s current value. But that’s where the appraisal contingency can come in quite handy.
The appraisal contingency protects a buyer from paying the listed price until they establish the property’s actual value. Ideally, the appraisal would need to be undertaken by a neutral party.
Real estate experts highly encourage making an appraisal-contingent offer when applying for a mortgage, as lenders typically request an appraisal to determine the amount of loan you qualify for. Note that no lender would offer you a mortgage loan more than the property’s appraised value.
3. Title Contingency“Contingency” and “pending” are near-similar concepts in real estate. However, the two terms differ regarding how far/close a property is to getting sold.
The title is another key thing to spell out in a contingent contract. You need to be certain you’re purchasing a property with a clean title.
That means the home should not be subject to outstanding disputes, caveats, or liens. Most importantly, the title contingency gives you ample time to establish a home’s ownership history.
Remember that once the property changes hands, any future legal actions will be lodged against the current owner – you.
Benefits of Real Estate Contingencies for Buyers
Real estate contingencies can protect buyers from investing in problematic property listings. These clauses ensure you don’t rush to purchase a building or home with fundamental structural issues or ownership disputes.
Contingencies are especially vital for buyers hundreds of miles from their target investment locations. The fact that you don’t come from the same neighborhood where the seller’s property is located puts you at a greater disadvantage in missing unforeseen issues with the home you intend to buy.
A contingency clause allows you to freely void a sales contract if you discover something wrong with a property. If you had advanced some down payment, voiding the contract also entitles you to a full refund. The seller can then relist their property and hope a less diligent buyer will fall for it.
Benefits of Real Estate Contingencies for Sellers
Contingency clauses not only benefit potential real estate buyers. Prospective sellers can also find these conditional agreements incredibly useful. So, understanding contingent meaning in real estate is essential, whether you’re a property seller or buyer.
As a seller, a contingent offer can help vouch for a buyer’s seriousness. For instance, buyers who agree to advance some down payment are serious about buying your property.
Remember that the internet is replete with busybodies who’re only out to waste the valuable time of other meaningful users. Some idle minds somewhere might just sign up for an account on a property listing website and go house-shopping when they have no intention of buying any home.
Drawbacks of Real Estate Contingencies
Despite their numerous benefits for buyers and sellers, real estate contingencies also have drawbacks.
For a prospective property buyer, making a contingent offer may be counterproductive in a seller market. The seller would simply cancel the contract and relist their property, convinced that a more willing buyer would come along.
Similarly, contingent offers might cause prospective sellers to lose a golden opportunity to dispose of their properties. The buyer would scroll through the website to find listings with more reasonable sales terms.
So, while a contingency clause may cushion prospective real estate sellers and buyers, it’s prudent to tread cautiously to ensure the offer remains attractive.
The saving grace is that contingent offers usually do not account for a significant percentage of failed real estate deals. A recent survey by the National Association of REALTORS® found that a paltry 5% of all contingent offers fall through.
Types of Contingency Statuses
Contingency offers may assume different statuses, depending on the conditions required by either party. Popular ones include the following;
- Contingent: Continue To Show (CCS) – Several conditions need to be met.
- Contingent: No Show – The seller has decided to remove the property from active listings as they’re certain the specified contingencies will be met.
- Contingent: With A Kick-Out Clause – The outlined conditions must be fulfilled by a deadline.
- Contingent: Without A Kick-Out Clause – There’s no specific deadline for meeting the requirements.
- Contingent: Short Sale – The seller is willing to accept less money than the buyer owes on their mortgage.
- Contingent: Probate – The property in question is being disposed of due to the owner’s death.
Contingent versus Pending
“Contingency” and “pending” are near-similar concepts in real estate. However, the two terms differ regarding how far/close a property is to getting sold.
Contingent meaning essentially implies the seller or buyer has accepted an offer subject to a few conditions being met.
In a pending scenario, all contingencies have been satisfied, and the property is changing hands.
There goes our definitive guide to contingency meaning in real estate. We hope this article provides the insights you need to determine the best time to invest in real estate while also analyzing the tell-tale signs of a property worth trading in.