As home sellers, we all hope for a fast, fool-proof deal, but that’s not the reality in most real estate transactions. More likely, your offers – even the good ones – are going to come with certain contingencies attached. What does it mean if a house is contingent? Here’s what you need to know.
If you are in the process of selling or thinking about selling your home, you may have heard the term “contingency” floating around in different contexts. But what are contingencies, and what is a contingent offer?
How Do Contingent Offers Work?
The first thing you need to know is that a contingent offer is not something exotic – in fact, it is the norm. Unless you’re selling “as is” to an all-cash buyer, you’re most likely only going receive contingent offers. What this means is that there are certain criteria that need to be fulfilled before the buyer’s offer become a legally-binding contract. Contingencies are mostly in place to protect buyers – basically, to allow them to back out of a sale under certain circumstances. As a seller, you may entertain other offers while the various contingencies are being removed, but you cannot enter into another contract.
These are the three most common contingencies you’ll encounter:
Home Inspection Contingency – This is the most common contingency and one that any smart buyer is going to want. A buyer will have a certain amount of time (17 days is standard in California) to get a professional inspection of your home to make sure it’s in good shape and to root out any problems. If problems are found, this contingency allows the buyers to either back out without penalty (earnest money returned), order additional inspections by specialists (experts on HVAC, asbestos abatement, radon leaks, etc.) or negotiate with you on fixing the problems (or crediting them in escrow so they can fix the problems later). This is a good reason to do your own professional home inspection before putting your house on the market. Finding out – in escrow – that you have termites or that you need all new plumbing is not the kind of surprise you want.
Financing Contingency – Most buyers are not coming in with an all-cash offer. They are going to need to get financing. Even if they are pre-approved, there is still a lengthy process involved in actually obtaining a mortgage, and many buyers will make their offer contingent on getting the loan they want. While you may be tempted to ask the buyer to waive this contingency, it may not be in your best interests to do so. If they’re going to have problems obtaining a loan, you don’t necessarily want your property tied up in escrow for months while the buyer struggles to sort it all out. Although a pre-approval letter isn’t a guarantee, asking that your buyer be pre-approved does lower the chances of running into mortgage-related delays – or having the deal fall apart due to lack of financing.
Appraisal Contingency – A buyer may not be certain of the value of your home. If that’s the case, they may ask for an appraisal contingency. This gives them the opportunity (again, within a delimited time frame) to hire a professional appraiser to determine the market value of your property. If the appraisal comes in at less than the sale price, the buyer then has the option of backing out (or renegotiating). In a hot seller’s market, you may be able to get the buyer to waive this contingency. But keep in mind, the mortgage company is still going to have an appraisal done, and if it comes in low, your deal may be in jeopardy (unless your buyer has additional cash they can put down to cover the difference between the sale price and what the appraiser thinks your property is worth).
Some contingencies expire automatically. That means that after a set period of them, they are no longer in force and the sale contract is fully binding. But some contingencies must be released in writing. If your contract contains this type of contingency, make sure the buyer gets their inspections done in a timely manner and signs off on the release. Otherwise, the buyer could cancel the contract up to the day of closing without any penalty – and you would have just wasted a whole lot of time.
Less common – especially in a seller’s market – are these two contingencies:
A Home Sale Contingency – This is a contract clause used when a buyer is only able to close on your home IF they are able to sell (and close on) their current home (within a specified amount of time, usually between 30 and 45 days). They likely need the money from the sale of their current home in order to close on your home. To make this acceptable to sellers, the clause usually allows you to continue marketing your home (with the stipulation that the buyer be given a certain specified period of time to remove the contingency if you do receive another offer). If the buyer cannot do this, the contract is void and you can accept the other offer (as long as you return the earnest money from the initial offer).
A Settlement Contingency – This is a similar clause to the home sale contingency. However, in this case, the buyer is already under contract with their current home – they’re just waiting on the closing so they can get their equity out and then close with you. This is a much less risky contingency for you, and so in most cases you do not have the option of continuing to market your property (as long as the buyer’s home closes by a specified date). If their home doesn’t close on time, you can terminate the contract, or decide to give them more time.
What is a Contingent Listing?
When you enter into a contract with a home sale or settlement contingency, your property listing on the MLS (and other places) may show as “contingent.” This lets other potential buyers (and their agents) know the status of home and allows them to make a “backup” offer, in the event your buyers aren’t able to sell their home and your deal falls through.
While almost all real estate deals involve one or more of the above contingencies, only those with a home sale or settlement contingency will be listed as “contingent” on the MLS. Those with the usual home inspection or mortgage contingencies will simply be listed as “pending.”