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What Does Contingent Mean In Real Estate?

"What does contingent mean in real estate?" Your complete answer is here! Get insider tips & avoid buying blunders with this guide.

Hilda Workman
Jan 23, 20241796 Shares32074 Views
As you search for a house to buy, you've likely encountered different property listings with various sale statuses such as for sale, closed, pending, and contingent. These statuses reflect the current stage of the property's sale process. It's crucial for a novice in real estate to grasp the meanings of these statuses and discern the distinctions among them. So the understanding of "What Does Contingent Mean In Real Estate"is essential for identifying properties on the market and will also guide you in making informed decisions on how to proceed with an offer.

What Does Contingent Mean In Real Estate?

In real estate, the term "contingent" generally implies dependence on specific circumstances. Specifically within the real estate context, "contingent" refers to a sale that hinges on the fulfillment of certain conditions outlined in the contract.
When a property is listed as contingent, it indicates that the owner has accepted an offer but remains open to other offers, contingent upon meeting all stipulated conditions. The successful completion of these conditions by both parties ensures the progress of the sale.
However, if complications arise, either party retains the right to withdraw, leading to the cancellation of the contract. Subsequently, the listing becomes active again in the market for potential sale.

Common Contingencies In Real Estate

A hand holding a bright yellow sticky note with the phrase "Home sale contingency".
A hand holding a bright yellow sticky note with the phrase "Home sale contingency".
Real estate transactions involve substantial sums of money, making it crucial for both parties to seek assurance that the deal will proceed without complications. To safeguard themselves against unforeseen circumstances, both buyers and sellers have the right to include contingencies in the contract. The following are some prevalent contingencies in real estate transactions:

Appraisal

When a buyer is securing a mortgage to purchase a house, it is highly likely that an appraisal contingency will be included in their offer. Lenders typically appraise the property before approving the mortgage to ensure its value aligns with the proposed loan amount.
If the property's appraised value falls short of expectations, the lender may request an increased down payment or, in some cases, decline to provide the loan. Including an appraisal contingency in the real estate transaction gives the buyer the option to reconsider the deal if the house appraises significantly lower than anticipated.

Title

Another contingency frequently included in real estate transactions is the title contingency. This provision allows buyers to investigate the property's title to determine whether the seller possesses a clear and unencumbered title.

Home Inspection

As implied by its name, a home inspectioncontingency grants the buyer the opportunity to inspect the property with the assistance of professionals before finalizing the purchase. This examination helps uncover any potential property damage in advance.
The contingency may specify the maximum amount the buyer is willing to invest in renovating the house. For instance, it might allow them to withdraw from the transaction if the anticipated renovation costs exceed between $300 and $500.

Mortgage

Even if a buyer secures preapproval for a loan, there is always a possibility of encountering unforeseen issues that could jeopardize the deal. Mortgagecontingencies provide the buyer with an exit option if, despite their efforts, they are denied a loan.

Home Sale

When a buyer already owns another property, they may choose to sell it and utilize the proceeds to acquire a new one. In such instances, buyers often include a contingency in the real estate transaction stipulating that they will proceed with the purchase of the new house only upon successfully selling their previous property within a specified timeframe.

New Housing

In situations where the seller is selling their current residence, they have the option to incorporate a new housing contingency into the contract. This provision allows them to withdraw from the deal, even after acceptance, if they encounter difficulty securing a new residence within a designated timeframe.

Example Of Contingency In Real Estate

To illustrate the concept of a contingency in real estate, consider the following example:
Imagine an individual offering to purchase a house for $400,000, providing a down payment of $80,000. They include an appraisal contingency, specifying that the property must appraise for at least that amount, and a survey contingency, limiting the expected renovation cost to $15,000. The offer is accepted, and the agreement is finalized.
If the appraisal returns a value of $400,000 or higher, and the survey reveals no significant issues, the sale can progress smoothly.
However, should the property appraise for less than $400,000, or if the survey uncovers renovation costs exceeding $15,000, the buyer has the option to withdraw from the deal or adjust their offer.

Types Of Contingent Statuses

A person passing the pen to someone.
A person passing the pen to someone.
Here are various categories of listings commonly encountered in the real estate market:
  • Continue to Show Contingent in Real Estate - This indicates that both parties have agreed to the contingencies, finalizing the deal. However, the listing remains active in case the offer doesn't succeed.
  • No Show Contingent in Real Estate - The seller has accepted the offer and opted not to keep the house available for sale in the market anymore. This suggests the offer has minimal contingencies or contingencies unlikely to pose issues.
  • Kick-out - The seller has the option to reject the offer if specific contingencies are unmet by a set deadline.
  • Without Kick-out - If the seller has accepted an offer with contingencies but hasn't specified a deadline for fulfillment, the overall process might take longer, as the buyer isn't rushed to meet contingencies promptly.
  • Short Sale Contingent - Indicates the seller has accepted an offer and is willing to sell the property for an amount less than what they owe to their lender. Short salestypically take longer due to lender involvement. The seller can seek backup proposals if the current offer falls through.
  • Contingent Probate - Involves a legal process where the court manages the assets of a deceased person. Similar to short sale contingent listings, in the case of probate sales, sellers accept an offer but can back out if transaction difficulties arise, considering other offers.

Distinguishing Contingent From Pending Status In Real Estate

A red and white "For Sale" sign with a "Pending" sign rider in front of a house.
A red and white "For Sale" sign with a "Pending" sign rider in front of a house.
The terms "contingent" and "pending" share similarities but exhibit distinct characteristics. In straightforward terms, an offer begins as contingent when it includes certain conditions. As these contingencies are fulfilled, the status of the offer transitions to pending.
In essence, a contingent offer represents the initial stage of negotiation, while a pending offer signals that the deal is on the brink of finalization, indicating substantial progress toward closure compared to the contingent stage.
When a house is marked as pending, it indicates one of two scenarios:
  • The buyer submitted an offer without contingencies.
  • The buyer initially made a contingent offer but has since eliminated those contingencies.
The latter situation is the reason for the transition in real estate listings from 'contingent' to 'pending'. In such cases, the seller's real estate agent receives the contingency removal from the buyer, marking the status change.
Real estate listings progress through four distinct 'statuses':
  • Active- The property is actively listed for sale on the MLS (multiple listing service).
  • Contingent- The seller has accepted an offer, but the buyer has not yet removed their contingencies (also known as active contingent).
  • Pending- The buyer has successfully removed their contingencies.
  • Sold- The sale is complete and officially recorded in the county where the property is located.
Changes in the status of a property for sale occur when the seller's real estate agent updates the listing in their local MLS.

What Contingencies Are Permissible In The Purchase Agreement

Buyers have the flexibility to make their offer contingent upon various factors, but four contingencies are particularly prevalent:

Inspection Contingency

When people hear about an inspection contingency, they often associate it with a home inspection. While a home inspection is the most common type for a buyer, there are other inspections they may consider.
Here are some of the more typical ones:
  • Termite
  • Roof
  • Pool
  • Chimney
  • Foundation
An inspection contingency doesn't limit the buyer to only conducting home inspections. This period allows them to carry out any necessary due diligence on the property.
Whether they are contemplating renovations and wish to bring in a contractor or if the property has undergone previous structural modifications requiring permit verification, this timeframe allows the buyer to thoroughly investigate the property.

Appraisal Contingency

An appraisal contingency is a provision in the purchase agreement that allows the buyer to withdraw from the deal if the appraised value falls short of the agreed purchase price.
The appraisal contingency period is the duration within which the buyer not only completes the appraisal but, more crucially, secures approval from their lender's underwriter.
In the context of a home loan, where the property serves as collateral, the appraisal serves as evidence of the property's value. Lenders mandate appraisals in real estate transactions to ensure the property is valued at least as much as the buyer is paying.
Buyers typically initiate the appraisal process shortly after ratifying the purchase agreement through their loan officer. During the appraisal, the appraiser considers the sale price and justifies it in the appraisal report by comparing the property to recently sold homes, also known as 'comps.'
In many cases, the appraised value aligns with the sale price, leading the buyer to remove the contingency by submitting an appraisal contingency removal.
However, in certain instances, the appraisal may come in lower than the sale price. According to the latest Confidence Index Survey by the National Association of Realtors, 6% of real estate listings experienced terminated purchase agreements, with appraisals accounting for 10% of these terminations.

Loan Contingency

A loan contingency also referred to as a mortgage contingency, is a provision in the purchase agreement that empowers the buyer to terminate the sale if they encounter difficulties securing financing.
The loan contingency period designates the timeframe within which the buyer ensures they obtain full approval for the loan.
While most buyers obtain a pre-approval letter from their lender before submitting an offer, it's crucial to note that pre-approval letters often fall short of constituting actual loan approvals.
Once the property is under contract, the buyer's loan officer initiates the underwriting process by sending all necessary documents to the underwriter. After reviewing the documents, the underwriter determines whether to issue a conditional loan approval.
While it's uncommon for a loan not to be approved with a pre-approval letter from a reputable loan officer, occasional instances do occur. In such cases, if the buyer included a loan contingency in their offer, they can withdraw from the sale and receive a refund of their deposit.
Typically, buyers remove the loan contingency after obtaining loan approval. This removal must occur before the contingency period concludes to prevent the seller from potentially canceling the purchase agreement.

Home Sale Contingency

Sellers often ponder whether accepting an offer with a home contingency is a wise decision. With the guidance of an experienced and astute realtor, such a contingency can be advantageous, as we will explore shortly.
When a buyer must sell their existing property before proceeding with the purchase of a new one, they typically present an offer contingent upon the sale of their home. In certain states, like California, this is simply termed a home sale contingency, governed by a singular addendum to the purchase agreement.
Conversely, in other states, two distinct types of home sale contingencies may exist: sale and settlement contingencies, and settlement contingency.
In addition to the type of contingency, the timeframe allocated for each contingency is crucial. The contingency period represents the duration during which the buyer must address and potentially remove a specific contingency.
A shorter contingency period is generally more appealing to the seller. If the buyer fails to address the contingency within the specified period, there is a risk of the seller canceling the purchase agreement.

Duration For Transitioning From Contingent To Pending

The timeframe for this transition varies significantly from one transaction to another. Deals with fewer contingencies generally progress more swiftly compared to those with numerous conditions.
Additionally, transactions lacking a kick-out provision might endure a prolonged duration, particularly since there is no specified deadline for the buyer to fulfill all necessary criteria.

Frequently Asked Questions - What Does Contingent Mean In Real Estate

Is It Possible To Submit An Offer For A House Under Contingent Status?

Absolutely, you can submit an offer for a home listed as contingent. Depending on the nature of the contingency, the seller may reconsider and accept your offer. At the very least, making an offer positions you favorably in case the current sale encounters any issues.

Is It Advisable To Consider Viewing A House Under Contingent Status?

While many accepted offers do proceed to completion, there are no guarantees. However, it is worthwhile to explore a home listing marked as contingent, especially if the listing agent continues to actively showcase the property. This activity may suggest an anticipation that the accepted offer could potentially fall through.

How Frequently Do Contingent Offers Fail To Materialize?

While not very common, it does occur. According to the National Association of Realtors, approximately 5 percent of real estate transactions encounter a breakdown before reaching the closing stage.

Conclusion

Contingencies play a significant role in the dynamics of a real estate transaction, exerting a substantial influence on the outcome of a home sale. That's why it is important to understand "What Does Contingent Mean In Real Estate". While price typically holds primary importance for both buyers and sellers, contingencies closely follow in importance. They often stand as the primary factor leading to a contingent listing returning to the market. This underscores the importance of selecting a skilled realtor who possesses a thorough understanding of each contingency's nuances and is adept at mitigating their potential to disrupt a home sale.
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