What does contingent mean?
If you’re asking this question, you need to know more than the meaning.
You need to know how the term “contingent” can have a major impact on your home sale.
Because it can.
It’s the number one reason why a real estate listing will fall through after being under contract.
I’m going to tell you everything you need to know so that you can reduce your chances of this happening to you.
Here’s what you’ll learn:
- The meaning of contingent in real estate
- Difference between contingent and pending
- Most common contingencies (with examples)
- How contingencies can ruin a home sale
Let’s dive in.
What does contingent in real estate mean?
Contingent in real estate means that the sale of a home is under contract but includes one or more contingencies.
A contingency is certain criteria in the purchase agreement that needs to be met before the sale can be final. Almost all contingencies in the agreement will be from the buyer, but they can come from the seller too.
Think of contingencies as clauses in the purchase agreement.
When a buyer makes a contingent offer on a house, they’re essentially saying, “I’d like to purchase the property, but I want to make sure some things are finalized on my end before closing the sale.”
Different types of contingencies can be included in a purchase agreement and each of them has a big impact on determining if the sale closes or not.
I’ll tell you how shortly.
An offer on a house that includes one or more contingencies is called a contingent offer.
A non contingent offer on a house means that the buyer did not include any contingencies in their offer.
Imagine you’re selling your home.
Would you rather have a buyer give you an offer that is contingent upon certain conditions being met or an offer without any of these conditions?
This is why you’ll see a lot of non contingent offers in a hot real estate market where buyers are competing with each other.
When a buyer makes a non contingent offer, they need to acknowledge they’re removing all contingencies.
Here’s what that looks like in the California purchase agreement.
Contingent offers are more common.
When a buyer includes any type of contingency in their offer, they need to remove it before the closing date.
This happens on an addendum to the purchase agreement called a contingency removal form. Here’s what that looks like.
Contingencies play a big role in real estate.
The buyer’s good faith deposit is at risk once the buyer removes their contingencies.
Shortly after a purchase agreement is under contract, the buyer will make a deposit to the escrow company. This is referred to as a good faith deposit or an escrow deposit.
The buyer risks losing this deposit to the seller should they want to back out of the sale after removing their contingencies.
From the seller’s point of view, having the buyer remove their contingencies is a big hurdle to cross as it means the buyer is more committed. This is why a non contingent offer on a house is more attractive to a seller.
What’s the difference between contingent and pending?
Contingent on a house for sale means that the property is under contract but some contingencies need to be met before the sale is final. A property that is pending means there are no contingencies.
You’ve probably seen the terms “contingent” or “pending” on a real estate listing.
They look like this.
When you see a house that is pending, it means one of two things:
- The buyer submitted an offer with no contingencies.
- They made an offer contingent upon certain items but have since removed their contingencies.
The latter is why you’ll see the status of a real estate listing change from “contingent” to “pending”.
When this happens, it means that the seller’s real estate agent received the contingency removal from the buyer.
This is known as a “status change”.
A real estate listing will go through four different “statuses”.
- Active – The property is currently 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 referred to as active contingent).
- Pending – The buyer removed their contingencies.
- Sold – The sale is final and has recorded in the county where the property resides.
You’ll see the status of a property for sale change after the seller’s agent updates the listing in their local MLS.
Which contingencies can be included in the purchase agreement?
Now that you know what contingent means in real estate, let’s discuss the different types of contingencies you might come across.
The buyer can make their offer contingent upon any type of contingency, but there are four that are more common than others.
- Inspection contingency
- Appraisal contingency
- Loan contingency
- Home sale contingency
It’s not just the type of contingency that is important, it’s the contingency period too.
A contingency period is the number of days that a buyer has before they need to remove that specific contingency. The lower the number of days is, the more attractive it looks to the seller.
If the buyer doesn’t remove the contingency by the end of the contingency period, then they risk having the seller cancel the purchase agreement.
When most people hear of an inspection contingency, they think of a home inspection contingency. While a home inspection is the most common inspection for a buyer, there are other inspections they might want to have done.
Here are a few of the more common ones:
An inspection contingency doesn’t mean a buyer is only allowed to do inspections. This contingency period allows them to do any and all due diligence on the property that they want.
Maybe they’re thinking of remodeling and want to bring a contractor out to the property. Or maybe the home has previous structural modifications and they want to check on the permits.
No matter what it is, this is the time for the buyer to finish doing their homework on the property.
What if a seller has inspections done upfront?
A seller has the option to have their inspections completed before marketing their property and putting it on the MLS.
When they do, it not only allows them to know what they might need to have fixed ahead of time, but it also gives prospective buyers more information about the property to help them make a more informed decision about what kind of offer they want to submit.
A good analogy for this is buying a car.
When you go to the dealership and shop for a used car, they’ll usually have a Carfax or something similar. This information is helpful because, without it, buyers may be hesitant about making an offer.
Well, it’s the same thing when buying a house but at a much higher price.
When a seller has inspections completed upfront, it improves the chances of a buyer not making their offer contingent upon any inspections.
Inspection contingency example
Let’s say a buyer made their offer contingent upon inspections.
They included a 14-day inspection contingency and decided to have a home inspection completed.
The buyer’s real estate agent helps coordinate the inspection and the report comes back on day 9. After going through the report with their agent, the buyer feels there are a couple of items that need to be addressed.
In this scenario, the buyer has three choices:
- Ask the seller to repair the items
- Negotiate with the seller to fix some of the items and/or reduce the sale price
- Do nothing and remove their inspection contingency
The location and type of market will affect what the buyer decides to do. In a neutral or buyer’s market, the buyer has more leverage, and sellers are more willing to negotiate or repair the items.
If the buyer wants to ask the seller to repair the items, they need to have their real estate agent send over a repair request.
This request is made on an addendum to the purchase agreement.
When the seller’s realtor receives this request, the seller can decide whether or not they want to make the repairs.
So in our scenario, let’s say the buyer’s agent sent the repair request on day 11. The seller’s realtor discusses it with the seller and they decide to go ahead and have the items repaired.
When this happens, the inspection contingency will be extended until the work is done. Once the work is completed, the buyer will submit a contingency removal form to the seller and their inspection contingency will be released.
What if the seller didn’t want to fix the items?
Then the buyer has a decision to make.
They can either try and negotiate to have some of the items repaired or have the work done themselves after the sale closes.
If the contingency removal isn’t submitted by day 14, then the seller has the option to send what’s called a notice to perform. A notice to perform tells the buyer that if they don’t remove their contingencies within a certain number of days (usually 1-2), then the seller can cancel the purchase agreement.
An appraisal contingency is a clause in the purchase agreement that allows the buyer to back out if the appraised value does not meet the purchase price.
The contingency period for an appraisal is the time frame the buyer has to not only have their appraisal completed but more importantly, signed off by their lender’s underwriter.
When a buyer gets a loan, the house is used as collateral, and an appraisal is proof of that collateral. This is why every lender requires an appraisal for a real estate transaction. They want to make sure that the house is worth at least what the buyer is paying for it.
The appraisal is ordered by the buyer’s loan officer shortly after the purchase agreement is ratified. When the appraiser goes out to the property, they are aware of the sale price and will need to justify that price in the appraisal report by comparing the property to recently sold homes (also known as “comps”).
In many purchase transactions, the appraised value will match the sale price. When this happens, the buyer will remove the contingency by submitting an appraisal contingency removal.
However, in some cases, the appraisal comes in lower than the sale price.
According to the latest Confidence Index Survey conducted by the National Association of Realtors, 6% of real estate listings had their purchase agreement terminated and appraisals were the cause for 10% of these.
So what exactly happens when the appraisal is lower than the sale price on a contingent offer?
Let’s find out.
Appraisal contingency example
A buyer and seller have agreed to a sale price of $1,200,000.
The appraisal comes back at $1,150,000.
The buyer has three options:
- Renegotiate the price
- Pay the difference
- Back out of the transaction
In a neutral market or a buyer’s market (more buyers than homes for sale), sometimes the buyer can renegotiate the price.
But remember, they made their offer contingent upon the appraisal. This means they can back out of the transaction (and get their deposit back) if the appraised value does not meet the sale price. And some buyers will do this.
In a competitive market where there’s high demand, many buyers will pay the difference. Here’s where many people get confused; the buyer doesn’t pay the entire difference.
Banks will use the sale price or the appraised value, whichever is lower.
So, in our example, the buyer and seller agreed upon a $1,200,000 purchase price and the appraised value came in at $1,150,000.
This means the lender will lend on the $1,150,000 amount and not $1,200,000. In this scenario, the buyer does not pay the full difference of $50,000.
If the buyer planned on putting 20% down on $1,200,000, that means they planned on a $240,000 down payment.
Since the appraised value came in at $1,150,000, this means the buyer will now need to pay 20% of $1,150,000 (which is $230,000) plus the difference of $50,000. This means that the down payment will now be $280,000.
In other words, if the purchase agreement is contingent upon the appraisal, and the appraisal comes in lower than the sale price , then the buyer will pay 80% of the difference between the appraised value and the sale price, not the entire 100%.
How an appraisal contingency can affect the seller
An appraisal contingency doesn’t just have an impact on the buyer, it affects the seller too.
Let’s say your real estate calls you and says that they’ve received a non contingent offer at a phenomenal price.
You’re ecstatic, right?
What if the appraisal comes in lower than the sale price and the buyer doesn’t have the funds to pay the difference?
You are either going to have to lower the sale price or cancel the purchase agreement and put the house back on the MLS.
How do you prevent this from happening?
When interviewing real estate agents, you’ll want to make sure they know how to vet an offer. By doing so, they can find out how much money the buyer has.
If the buyer only has enough for their down payment and closing costs, your agent should explain the pros and cons of accepting an offer that includes an appraisal contingency.
A loan contingency, also known as a mortgage contingency, is a clause in the purchase agreement that allows the buyer to cancel the sale if they are not able to get financing.
The loan contingency period is the time frame a buyer has to make sure they’re fully approved for the loan.
Most buyers will get a pre-approval letter from their lender before they make an offer on a home. A pre-approval letter is a great start but most pre-approval letters are not actual loan approvals.
As soon as the property is under contract, the buyer’s loan officer will send all of the necessary documents to the underwriter to start the underwriting process. Once the underwriter looks over the documents, they’ll decide if they should issue a conditional loan approval or not.
It’s rare for a loan to not get approved if the buyer has a pre-approval letter from a good loan officer, but it does happen. When it does, and if the buyer made their offer contingent upon the loan, then they’re able to back out of the sale and get their deposit back.
In most cases, the buyer will remove their loan contingency after they receive their loan approval. They need to submit their loan contingency removal before the contingency period expires or risk having the seller cancel the purchase agreement.
Sale of home contingency
Many sellers will ask if they should even accept an offer that includes a sale of home contingency.
If you have an experienced and savvy realtor, it can work in your favor. We’ll discuss how, shortly.
When a buyer needs to sell their property before they’re able to purchase a new one, they’ll make an offer contingent upon the sale of their home.
In some states (e.g. California), this is simply known as a home sale contingency and there is one addendum to the purchase agreement.
In other states, there are two different types of home sale contingencies:
- Sale and settlement contingencies
- Settlement contingency
This is what the home sale contingency addendum looks like in California.
No matter the state, a home sale contingency operates in a similar capacity.
Sale and settlement contingency
A buyer will include a sale and settlement contingency when the property they’re selling is not yet under contract.
This usually happens when the buyer doesn’t want to be in a time crunch and make an offer on a home after their home is in escrow.
As a seller, getting an offer contingent upon a sale and settlement contingency can seem daunting.
And it can be.
Instead of worrying about one buyer being able to close, you now have to worry about two. Plus, the time to close is going to be much longer than the average sale.
Most sellers who accept an offer with this contingency will do so because their home has been on the MLS for some time.
But if a seller is working with a real estate agent who knows how to negotiate, they can use a sale and settlement contingency to their advantage.
First, the buyer is getting the ideal scenario with this type of offer.
They’re playing it safe and waiting to put their home on the MLS until they have a ratified contract on their new purchase. Plus, they have fewer homes to choose from as many sellers won’t accept an offer contingent upon the sale of their property.
Because of this, the agent should be able to negotiate a higher price.
Second, a sale and settlement contingency allows the seller to accept a backup offer and “kick” the buyer out if they don’t remove their contingency within a certain timeframe (usually 1-3 days).
A great real estate agent will use this to their advantage and market the property accordingly.
What is a kick out clause?
A kick out clause allows the seller to kick the buyer out of the sale if they receive a backup offer that does not include a sale and settlement contingency.
When a seller receives the backup offer, they can notify the buyer and request that they remove the contingency.
If the buyer doesn’t remove it, then the seller can accept the backup offer (buyer gets their deposit back).
Here’s how the language in the California purchase agreement reads for a kick out clause.
As a seller, you want your agent to be aggressive and see if they can attract a better offer.
Sometimes, just changing the status from active to contingent will spark more interest from buyers. When a home has been on the market longer than usual (common for homes that accept a sale and settlement contingency), buyers start to question why.
Once the status has changed, it shows that there was someone else interested and that there’s an opportunity for a new buyer to take advantage.
A settlement contingency is when the buyer has a ratified purchase agreement on their current residence but have not yet closed.
This contingency protects the buyer in case their sale falls through.
Many sellers are more receptive to accepting an offer that is contingent upon a settlement contingency as opposed to an offer that is contingent upon a sale and settlement contingency.
Contingencies in real estate can have a big impact on the sale.
Price is almost always most important to both the buyer and seller, but contingencies come in a close second.
They’re another reason why selecting the right real estate agent to sell your house is critical.
The best ones don’t just excel at negotiating, they know the intracicies of every contingency and how to prevent them from causing a disaster to the sale of your home.