What does contingent mean? In real-estate contingent means the seller has accepted a purchase offer, but the sale is contingent upon certain conditions which have to be met.
In the real estate world, contingency clauses – also referred to simply as “contingencies” – exist to protect both sides of a transaction. They provide an escape hatch of sorts, allowing the buyer or seller to back out of the contract should certain conditions not be met.
How Do Contingencies Work?
A contingency clause defines a specific action or condition that must be completed before the contract can be considered binding. You will often find these clauses in real estate contracts or as part of the initial purchase offer on a home.
To get an idea of how contingencies work when buying a home, it’s important to first understand how a real estate transaction functions. These typically go as follows:
- A buyer makes an offer to the seller, who then accepts or rejects the bid.
- The seller may choose to counter the offer or negotiate parts of the deal until both sides are in agreement on the terms. If the parties cannot agree, they go their separate ways and no obligation is made.
- If they agree to the terms, the buyer makes an earnest money deposit, indicating their good faith and intent to purchase the property. This is typically 1 percent of the sales price of more. These funds are usually held by an escrow company until closing day.
Contingencies may come into play as part of:
- The initial offer. The buyer may include contingencies in their bid from the outset.
- The negotiation phase. Either the buyer or seller may opt to add (or remove) contingencies as part of the bargaining process.
Contingencies: The Nitty Gritty
Contingencies always come attached to a deadline. If the buyer or seller has not canceled the contract by the deadline, they can no longer back out of the deal.
Contingency clauses also include details as to what conditions must be met, as well as the precise steps of the cancellation process should a party decide to pull out.
Regardless of what side of the transaction you are on, you should always make note of these contingency details when considering an offer or contract. Make sure to add them to your calendar to prevent missing any important deadlines.
Types of Contingencies
There are generally four types of contingencies you’ll come across in real estate transactions. These include:
- The Appraisal Contingency – This is a buyer-initiated contingency that offers options should the property appraisal comes in under the purchase price. The buyer can choose to either renegotiate the purchase price or back out of the deal if an agreement cannot be reached.
- The Home Inspection Contingency – This is another contingency designed to protect the buyer, giving them a “due diligence” period during which they can have the home inspected by a professional. Should issues arise during these inspections, the buyer can negotiate repairs, renegotiate the price to account for the condition of the home or cancel the contract entirely. Home inspection/due diligence periods typically last anywhere from three days to two weeks.
- The Mortgage Approval Contingency – This contingency protects the buyer in the event their loan terms change significantly or they are unable to secure financing. Typically, if a lender offers a different deal than states in the initial offer, changes the loan type or requires more of a down payment, the buyer can cancel the contract and will no longer be on the hook for the purchase. Almost all buyer use these contingencies unless they are paying with cash.
- The Insurance Approval Contingency – Another common contingency, this one says the buyer can back out of the transaction should they be unable to secure homeowner’s insurance at an affordable price. Though it doesn’t happen often, sometimes insurance companies will refuse to cover a home if it’s had mold or other serious issues in the past.
- Right to Assign Contingency – A standard contingency for real estate investors. A wholesale contract could include an Assignment of Contract, which gets an investor the option to back out of a deal if unable to assign the real estate contract to another buyer in a certain timeframe. This contingency is used by wholesalers to protect themselves in the event a buyer defaults.
It is important to understand what does contingent mean because a home is usually the biggest purchase of a person’s life, and contingencies such as these ensure that investment is a sound one. They afford buyers the chance to assess the property, make sure its value is appropriate and secure financing to cover the costs. If the conditions of the contingencies aren’t met, the buyer can back out and find a property that better suits their long-term financial needs.
Keep in mind, as each contingency period ends, you must either remove the contingency from the contract (in writing), elect to move forward with the transaction or cancel the contract.
In some cases, you may want to waive contingencies, either when first presenting an offer or during the negotiation phase. You should only waive contingencies if you are absolutely sure of your decision. Canceling the contract without a contingency would cause you to lose your earnest money deposit.
The most common reasons for waiving contingencies are:
- To stand out from other buyers – If you’re in a bidding war or making an offer in a particularly competitive market, waiving contingencies may make you a more attractive buyer to sellers. Many buyers will waive inspection or appraisal contingencies in order to stand out and secure a property when competition is hot. In San Francisco, a seller’s market, waving contingencies and all cash offers are very common and often the best way to win against other bidders.
- To speed up the closing process – You can waive contingencies after you’ve already put an offer on a home, skipping things like appraisals, inspections, and other time-consuming steps. This can speed up the purchase process — often a benefit to both buyer and seller.
In general, sellers are always going to favor offers with fewer or shorter contingency periods, as this gives them more confidence in the buyer and their ability to follow through. Most sellers want to avoid going back to the drawing board, which would only draw out the process and delay their move.