Discover the true meaning of “contigent” in real estate and how it impacts the journey of both buyers and sellers. This all-encompassing guide delves into various types of contingencies, empowering you to navigate real estate transactions with confidence and ease.
If you’re wondering about the term “contingent” in the realm of real estate, you’re not alone. Understanding its implications is crucial for a successful home buying or selling experience. This term can significantly affect the real estate process, often leading to contract failures.
Contingencies play a significant role in the intricate world of real estate transactions, often determining the success or failure of a deal. In the realm of real estate, it is crucial to distinguish between contingent and pending statuses. While both terms indicate progress in the transaction, they differ in the level of certainty they provide.
To fully grasp the significance of contingencies, it is necessary to explore the most common types and their real-life implications. Some prevalent contingencies include financing, home inspections, appraisal, and title search. Each of these conditions serves a unique purpose, safeguarding the interests of the buyer or seller.
Our goal is to provide you with comprehensive knowledge of contingencies, empowering you to make informed decisions and minimize risks. Let’s dive in as we uncover more about defining contingent in real estate, the difference between contingent and pending, and the most common contingencies with real-life examples.
What Does Contingent Mean In Real Estate?
A contingent sale refers to a home under contract with specific conditions that must be met before the sale can be finalized.
When a house is described as contingent, it signifies that an offer has been made and accepted, but the transaction is still dependent on certain conditions being fulfilled before it can be considered finalized.
This term “contingent” implies that the sale’s progression and ultimate success hinge upon the satisfaction of specific requirements. These conditions serve as a safety net for all parties involved, ensuring that all necessary steps are taken and all concerns are addressed before the sale is considered complete.
So when you encounter the term “contingent” in the context of real estate, remember that it denotes a situation where an offer has been accepted, but the deal is not yet finalized due to the presence of additional criteria that need to be met before the transaction can be considered complete.
In most cases, contingencies originate from the buyer; however, they can also be initiated by the seller. Various types of contingencies can be incorporated into the purchase agreement, significantly impacting the ultimate success of the sale.
A contingent offer on a house involves one or more conditions that the buyer must fulfill. Conversely, a non-contingent offer signifies that the buyer has waived all contingencies, making it more appealing to sellers in competitive markets.
In a hot real estate market, non-contingent offers are prevalent as buyers compete against each other. Sellers generally prefer non-contingent offers due to the increased commitment from the buyer. However, contingent offers are more common and serve as a safety net for both parties. Once a buyer has removed their contingencies, they must do so before the closing date using an addendum called a contingency removal form.
Contingencies play a crucial role in real estate transactions, as they protect the buyer’s good faith deposit. This deposit, also known as an escrow deposit, is at risk once the buyer removes their contingencies. By removing contingencies, the buyer demonstrates a higher level of commitment to the sale, which is essential for both parties in achieving a successful real estate transaction.
What’s the difference between contingent and pending?
In the world of real estate, understanding the differences between “contingent” and “pending” is vital for navigating the intricacies of property transactions. While both terms indicate a house under contract, they signify distinct stages in the sales process.
A contingent property refers to a situation where an offer has been made and accepted, but certain conditions must be met before the sale can be finalized. These contingencies act as safeguards for both the buyer and the seller, ensuring that all necessary steps are taken and concerns are addressed before the transaction is considered complete.
On the other hand, a pending property implies that either the buyer initially submitted an offer without any contingencies or they made an offer with contingencies but subsequently removed them. This status change from contingent to pending is significant, as it indicates the buyer’s increased commitment to the sale and a smoother path towards closing.
In the real estate industry, a property listing typically goes through four different statuses:
1. Active: The property is currently listed for sale on the Multiple Listing Service (MLS).
2. Contingent (also known as Active Contingent): The seller has accepted an offer, but the buyer has not yet removed their contingencies.
3. Pending: The buyer has either submitted an offer without contingencies or removed their initial contingencies.
4. Sold: The sale is finalized, and the transaction has been recorded in the county where the property is located.
These status changes are updated by the seller’s real estate agent in their local MLS, reflecting the progression of the property sale from initial listing to a successful closing.
Types of Contingencies
Understanding contingencies is crucial in the world of real estate, as they significantly impact the success or failure of a transaction. Contingencies provide protection for both buyers and sellers, ensuring all necessary steps are taken and concerns are addressed before a sale is considered complete.
In the realm of real estate transactions, buyers have the flexibility to make their offers contingent upon various conditions that suit their needs. While there are numerous types of contingencies, some are more prevalent than others. These common contingencies include:
1. Inspection Contingency: This allows the buyer to conduct a thorough inspection of the property, ensuring that they are aware of any potential issues or repairs that may be required.
2. Appraisal Contingency: This contingency protects the buyer by ensuring that the property’s appraised value matches or exceeds the agreed-upon purchase price. This safeguards the buyer from overpaying for the property.
3. Loan Contingency: This contingency is crucial for buyers who require financing to complete the purchase. It ensures that the buyer can secure the necessary loan within a specified time frame, typically with a pre-approved mortgage.
4. Home Sale Contingency: In situations where the buyer needs to sell their current property to finance the new purchase, a home sale contingency is added. This contingency allows the buyer to back out of the deal if they are unable to sell their existing home within a specified time frame.
It is essential to consider not only the type of contingency but also the contingency time frame. The duration of these periods varies, and a shorter time frame can make the offer more appealing to the seller. If the buyer fails to remove the contingency within the agreed-upon time frame, the seller may choose to cancel the purchase agreement.
1. Inspection Contingency
An Inspection Contingency, often associated with a home inspection, is a crucial aspect of a real estate transaction for buyers. While a home inspection is the most common type, other inspections may be desired, such as termite, roof, pool, chimney, and foundation inspections. An inspection contingency allows the buyer to conduct due diligence on the property, including assessments by contractors or examining prior structural modifications and permits.
In some cases, sellers may have inspections completed before listing their property. This practice provides them with advance knowledge of potential repairs and offers buyers valuable information for making informed offers. It can also increase the chances of a buyer not requiring inspection contingencies, reducing the likelihood of buyers backing out or renegotiating after acceptance.
In a real-life scenario, a buyer with a 14-day inspection contingency conducts a home inspection. If issues are identified, the buyer has three options: request repairs from the seller, negotiate a repair or price reduction or remove the contingency without repairs.
The choice depends on the market conditions – buyers in neutral or buyer’s markets may have more leverage. If the seller agrees to repairs, the inspection contingency is extended until the work is completed. If not, the buyer may negotiate, self-fund repairs post-sale, or risk the seller issuing a ‘notice to perform’ if contingencies aren’t removed within the agreed timeframe.
2. Appraisal Contingency
An Appraisal Contingency is a clause in the purchase agreement that allows the buyer to withdraw if the appraised value doesn’t match the purchase price. The contingency period allows time for the buyer to have the appraisal completed and approved by their lender’s underwriter. In a real estate transaction, lenders require appraisals to ensure the property’s value aligns with the loan amount.
The buyer’s loan officer initiates the appraisal process shortly after the purchase agreement ratification. The appraiser compares the property to similar recent sales (comps) to justify the sale price in their report.
When the appraisal value matches the sale price, the buyer removes the contingency by submitting an Appraisal Contingency Removal. However, in some cases, the appraisal comes in lower than the sale price. According to the National Association of Realtors’ Confidence Index Survey, 10% of terminated purchase agreements were due to appraisal issues.
In such scenarios, the buyer has three options: renegotiate the price, pay the difference, or back out of the transaction. In neutral or buyer’s markets, buyers may renegotiate, while in competitive markets, they often pay the difference. Banks use the lower of the two values (appraised or sale price) when determining the loan amount.
For example, if the agreed sale price is $1,200,000, and the appraisal comes in at $1,150,000, the lender will provide a loan based on $1,150,000. The buyer then pays the difference by adjusting their down payment. In this case, the buyer would pay 20% of $1,150,000 plus the $50,000 difference, resulting in a down payment of $280,000.
An Appraisal Contingency also affects sellers, as a lower appraised value could lead to canceled purchase agreements or price reductions if the buyer cannot cover the difference. To prevent such situations, realtors should vet buyers and their offers, ensuring they understand the implications of appraisal contingencies.
3. Loan Contingency
A Loan Contingency, also known as a Mortgage Contingency, is a clause in the purchase agreement that permits the buyer to cancel the sale if they fail to secure financing. The Loan Contingency period allows time for the buyer to ensure they receive full loan approval. While many buyers obtain a pre-approval letter from their lender before making an offer, this letter does not guarantee an actual loan approval.
Once a property is under contract, the buyer’s loan officer submits the necessary documents to the underwriter for the underwriting process. The underwriter reviews these documents and may issue a conditional loan approval. Although rare, loan approval denial can occur, especially if the buyer relies solely on a pre-approval letter.
If the buyer’s offer is contingent on loan approval and they are denied, they can withdraw from the sale and recover their deposit. In most cases, buyers remove their Loan Contingency after receiving loan approval. They must submit the Loan Contingency Removal before the contingency period ends to avoid the seller canceling the purchase agreement.
4. Sale of Home Contingency
A Sale of Home Contingency occurs when a buyer needs to sell their property before purchasing a new one, leading them to make an offer contingent on the sale of their existing home. In some states, this is known as a Home Sale Contingency, with a specific addendum in the purchase agreement.
There are two types of Home Sale Contingencies:
Sale and Settlement Contingencies:
In a Sale and Settlement Contingency, the buyer includes this clause when their property is not yet under contract. This provides them with more time and security, but it can be daunting for sellers who now have to worry about two closing processes.
Sellers who accept such offers typically have their property listed for an extended period, and skilled realtors can leverage this situation to negotiate higher prices.
A backup offer with a “kick-out” clause allows sellers to accept alternative offers if the initial buyer fails to remove their contingency within a specified timeframe (usually 1-3 days). A great real estate agent can use this clause to market the property more aggressively and potentially attract better offers.
Settlement Contingencies:
A Settlement Contingency applies when the buyer has a ratified purchase agreement on their current residence but has not yet closed. This contingency protects buyers if their sale falls through. Sellers are generally more receptive to offers with Settlement Contingencies compared to Sale and Settlement Contingencies.
Navigate Real Estate Transactions with Confidence
When exploring the different types of contingencies, such as inspection, appraisal, loan, and sale of home contingencies, it is essential to consider not only their types but also the contingency time frame. A skilled real estate agent can help navigate these complexities and provide valuable insights to ensure a smooth and successful real estate transaction.
If you’re seeking valuable guidance on how to find the right real estate agent for your unique needs, we invite you to explore our comprehensive article titled “5 Must-Ask Questions for Finding the Ideal Real Estate Agent: Expert Insights from Xcellence.”
At Xcellence, we are redefining the home buying experience by introducing an integrated approach that unifies real estate, mortgage, and title services. This innovative strategy ensures a seamless journey for our clients, setting us apart as pioneers in the industry.
Our team of dedicated professionals at Xcellence Realty is committed to providing exceptional service and support throughout your home buying journey. Our agents are equipped with in-depth knowledge of the local market, negotiation strategies, and a deep understanding of the intricacies of real estate contingencies.
We invite you to find an Xcellence agent in your area and experience the difference firsthand. Discover the Xcellence way by visiting our website and taking the first step towards a successful real estate journey.
