What is a Contingent Offer?

Much like all things in life, real estate is filled with “what ifs”. When you are buying a home, the “what ifs” are handled, or at least alleviated, through contingency contracts. A contingency is a statement that is added to your contract that allows you the right to back out of the deal without forfeiture under specific circumstances. Contingencies are often used by buyers who are not 100% confident they are ready (or capable) to buy the property, and want some extra time to decide. They protect you from losing earnest money and give you an advantage to get the seller to help you deal with any issues that might arise. As a buyer, contingencies are pleasant because they usually work to the buyer’s protection.

Most Common Contingencies: 

#1 Loan Contingency: 

  • Most common type of contingency

  • Means the buyer’s offer is dependent on them being able to secure financing for the property 

  • Under the loan contingency, the seller allows the buyer a specific time to get a loan to cover the purchase. If the buyer can not get a lender to commit by the set date, the buyer can walk away from the sale without penalties, and get their down payment back

  • Having a loan contingency protects the buyer in the event they are unable to get approved for a loan

#2 Appraisal Contingency: 

  • If the property does not appraise at or below the purchase price, the buyer can back out of the deal; or the buyer can ask the Seller to drop the price, and if denied, the buyer has the opportunity to back out of the deal

  • The appraisal contingency often goes hand-in-hand with the loan contingency, as the lender will not fund the loan above the appraised price 

#3 Inspection Contingency: 

  • AKA the “Due Diligence Period” or a “Due Diligence Contingency”

  • This contingency says that the Buyer has set amount of time (often ranging from 3-14 days), where they can do whatever they need to do to ensure that they want to buy the property. This might include inspections, appraisals, contractor walk-throughs, etc. 

  • If at any time within that inspection period the Buyer chooses to back out of the deal for any reason, they can.  

#4 Selling a Current Property: 

  • Selling a current property becomes more prominent these days among homeowners looking to upgrade their current house

  • This contingency basically says that the Buyer has a right to back out of the deal if they can not sell their current residence 

  • Generally, the contingency will call out a time period for which the contract is in effect, thereby giving the Buyer that amount of time to sell their other property 

Do I have any chance getting my offer accepted if mine is contingent?

  • The fewer contingencies used in an offer, the more attractive the offer will be to the Seller

    • As a buyer, you want to limit the contingencies to only those that are absolutely necessary. In other words, do not use more than necessary to protect your interests

    • The ability to use no contingencies in an offer makes the offer much stronger than competing offers

  • If possible, limit your offer to a single contingency

  • Only execute a contingency if absolutely necessary

The Bottom Line

While adding complexity to the transaction, buyer’s contingencies are ultimately what make deals happen. Without them, most buyers and sellers would be unable to find the common ground required to mutually commit to the transaction. The key is that even when contingencies are used, the goal is not to use it to back out of the deal; rather, use it to revisit the original deal and try to come to a reasonable compromise that resolves the issue(s) and makes both parties happy. 
 

Works Cited: 

How Does A Contingency Home Sale Work. (2017, March 20). Retrieved July 05, 2017, from http://sellingwarnerrobins.com/how-does-a-contingency-home-sale-work/

Scott, J. (2014, November 24). Real Estate Contract Contingencies and 4 Rules for Using Them. Retrieved July 05, 2017, from https://www.biggerpockets.com/renewsblog/2010/03/31/contract-contingencies-and-4-rules-for-using-them/Folger, J. (2017, February 19).

Home Sale Contingencies: What Buyers And Sellers Need to Know. Retrieved July 05, 2017, from http://www.investopedia.com/articles/personal-finance/111513/home-sale-contingencies-what-buyers-and-sellers-need-know.asp