Buying a house is one of the best forms of investment, especially with prices in real estate going up. The National Association of Realtors announced that in 2020 there were about 5.6 million homes that traded ownership. But given the high number of real estate transactions, there are still a lot of uncertainties in the process. It is important to have contingencies in place to ensure that you can limit the number of surprises per transaction and you can get the upper hand in every situation. What does contingent mean in real estate? And why does it matter in your real estate transaction?
As a buyer, you want to protect yourself from the uncertainties involved in a real estate transaction. With such a big purchase, there are several parties and factors involved. This is why every home sale is placed under ‘contingent’ to give the buyers the opportunity to back out when something goes wrong during the sales process.
So, what does contingency mean? The term literally means “depending on certain circumstances” when used in a real estate setting. Whenever a house listing is tagged as contingent, it implies that an offer has been made and has been accepted by the buyer. However, there are certain criteria that must be met before the deal is completed.
Let’s take this example – a buyer and seller agree on the price for the purchase of a home. However, the buyer only agrees to this price as long as certain conditions are met, such as that the home inspection report is good. Then, the real estate contract is deemed contingent because the buyer is given the option to back out of the contract.
Not all home sellers agree to contingencies in a real estate contract. Therefore, you need to be aware of that when making an offer for a home. But as a buyer, you definitely want contingencies in place so you can be protected and to avoid significant financial loss. Without a contingency clause in your contract, you are deprived of the opportunity to get a refund of your earnest money deposit.
Knowing what contingency means also requires you to understand the most common examples of contingencies in real estate. Here are a few examples so you can be informed when entering into a real estate transaction.
A home inspection is a must when buying a home – brand new or not. It provides you with a detailed report on the condition of the home at the time of the sale. It also lets you know if there are any issues that must be fixed before you move in.
The home inspection report is critical to your contingency clause when making an offer on a home. It does not mean that you have to walk away if the home inspection report comes back with a few issues. Instead, you can use it as a negotiation point with the seller in order for them to cover the repairs for these issues or to negotiate a lower price.
When you see a home you like and you want to make an offer on it, you pay the earnest money deposit to secure that property and to have the seller take down the listing for the home. Since this deposit is paid during the early part of the home purchase, there is no guarantee yet that you will get approved for financing.
The good news is that you can add a mortgage contingency to your contract. Getting pre-approved for a loan does not guarantee that you can get approved for the actual loan. If you fail to secure financing, you can use this contingency clause to back out of the contract, especially if you had to rely on that loan to pay for the home purchase.
A good tip to keep in mind would be to manage your finances during this time. This will prevent any unexpected surprises when applying for a loan.
This is one of the most common contingencies in real estate. It is not uncommon for a seller to price their home higher than the appraised market value. A professional appraiser is more experienced and well-versed in assessing the actual market value of the home. The appraiser can be provided by the lender or you, the buyer. Either way, they are in the best position to determine the actual value of the home.
In the event that the appraiser sets a lower value, you can opt out of the contract, especially if you don’t have enough cash to pay upfront and make up for the difference between the appraised value and the seller’s asking price.
Several home buyers search for homes to buy with the intent of using the money they earn from selling their current home as payment. You can use this as a contingency when buying your new home. Thus, you can keep the purchase of the home on hold while you wait for the completion of the sale of your current home.
It is worth noting that not all sellers will agree to this, especially if there are other prospective buyers who do not have this condition. In a slow market, sellers might be open to this clause.
The title is an important document that you need to secure when making a home purchase. However, it is not uncommon to find homes that have no “clean titles.” It is risky for a buyer to go through with the home sale process without a title. This contingency clause is meant to protect you from future claims or complications when you need to transfer the title to your own name.
Knowing what contingency means in real estate will help you become better prepared to negotiate and enter the home buying process. Even if you have your heart set on a particular home, avoid being hasty in this process. Create a thorough contingency clause so that you have the protection you need and can negotiate the best terms.