When it comes to home buying, you might run into more than one term that you may not be familiar with. One, in particular, that's a puzzler for many is "contingent." So, what does contingent mean in real estate?
What does contingent mean when buying a house?
Broadly, contingent means dependent on something else. In the instance of buying and selling real estate, a contingent house is one where the buyer has put down an offer and the seller has accepted. However, closing the sale depends on certain criteria being met.
In other words, you’ve made an offer your seller is ready to accept, but there are a few loose ends to tie up before you can actually close.
These loose ends, or contingencies, are typically outlined in the purchase contract.
What types of contingencies are there?
There are a few types of contingencies in real estate and not all are created equal. Let's take a look at the various contingencies you might see.
In the traditional way of buying and selling, many buyers find themself faced with a common predicament: needing to sell their old house in order to buy the home they want. Their current house is their biggest asset and facilitates the purchase of their new home — on paper. In reality though, the funds a buyer needs to afford their new home are tied up in equity.
Enter, the sales contingency.
Buyers who cannot afford to purchase their new home until their old one has sold or can’t hold two mortgages simultaneously must include a sales contingency in the purchase contract. They can only close on the new home after their old one has sold.
Of all the contingencies, a sales contingency can be one of the biggest red flags to a seller. From a seller’s perspective, they are both uncertain and can take the longest time to sort out. As anyone who’s bought and sold a home the traditional way before knows, complications can pop up at any given moment, causing offers to fall through.
Because there’s no guarantee a buyer’s home will sell, sellers often avoid selecting an offer with this contingency when they have the choice, making a sales contingent offer one of the weakest at the table.
Luckily, solutions like the Knock Bridge Loan™™ enable buyers to make offers free of sales contingencies - before selling their old home.
Unless you have enough money in the bank to purchase your home with straight cash, you’re most likely going to have to secure financing. This means working with a lender who will approve you for a new home mortgage.
Buyers who want to make an offer on a house before securing their financing will need to include a financing or mortgage contingency. These clauses typically last for a certain time period, giving the buyer the opportunity to close their new home loan, before they ultimately expire.
Like a sales contingency, financing or mortgage contingencies can be sticking points for sellers. Obtaining financing can take some time (the National Realtors’ Associate reports up to 40 days) and, as a general rule, sellers prefer speed.
To understand a title contingency, it’s helpful to first understand what a title is in real estate. The title to a property is the legal right to own the property. It’s what gives the seller the right to sell the property to the buyer. To change ownership hands, a title must be transferred from the seller to you, the buyer.
When you provide your lender with your purchase contract, they’ll then order the title report. This will confirm the seller’s ownership, as well as any liens on the property.
It’s important to understand that, unlike most forms of debt, a lien transfers hands with the property. In other words, if a buyer purchases a property and there are liens on the title, those liens are now their responsibility (not the original sellers).
If that concept sounds troubling to you, don’t worry. That’s where a title contingency comes in.
Title contingencies protect the buyer in the instance that there are liens or encumbrances on the title. If the seller is unable to successfully transfer the title to you free and clear, you as the buyer have the right to back out of the contract.
Even in the midst of a bidding war, you really shouldn’t consider waiving the title contingency. While most titles are successfully transferred with no problem, you could be signing yourself up a tangled ownership knot that could be stressful (and not to mention expensive) to unravel. This is a contingency where it’s definitely better to be safe than sorry.
Luckily, though, issues with titles don’t frequently pop up and title companies can deliver orders in as quickly as 3 days (though it’s wise to budget up to a week in your closing timeline).
A property appraisal might sound like a lofty concept, but it’s actually pretty straightforward. It’s simply a confirmation of the value of a property. During an appraisal, an unbiased third party called an “appraiser” will visit the home you are purchasing. They’re experts in determining property valuation and know what to look for when examining both the interior and exterior of a house.
After the appraiser conducts their visit, they’ll confirm the value of the home to your lender. If the appraiser values the home at an amount lower than what you’ve offered, you as the buyer will have two options: make up the difference or (and this is where the appraisal contingency comes in) back out of the contract.
Let’s say, for example, you’ve offered to purchase the home you want for $450,000 and the seller has accepted. However, your appraiser comes back and values the home at $440,000. Because most lenders will only fund the amount confirmed by the appraisal, you’d need to make up the $10,000 difference if you still wanted to purchase the home.
Home inspection contingency
Last, but certainly not least, we have the home inspection contingency. Similar to the other contingencies we’ve outlined so far, a home inspection contingency is designed to protect the buyer. It stipulates that the buyer can back out of the purchase contract if major structural problems are identified by a home inspector before closing. (Note: a home inspector is different than an appraiser. A home inspector won’t tell you the value of a house; they’re specifically on the lookout for issues with the condition of the house.)
Ordering a home inspection typically costs a few hundred dollars, but it’s a worthwhile expense. In the instance that a house has any of the qualifying issues outlined in the purchase contract, you as the buyer have the right to either negotiate for seller-paid repairs or back out altogether. In fact, many lenders require a home inspection.
In a competitive market, some buyers might feel tempted to waive a home inspection contingency - especially if they’re confident in the quality of the house. However, similar to the title contingency, the risk of waiving might outweigh the reward. That’s why it’s important to look at solutions like the Knock Bridge Loan™™ that make it possible to safely waive other contingencies (such as financing or sales) without risking the buyer’s rights.
Can I make an offer on a house that’s contingent?
Typically, yes, you can make an offer on a house that's contingent! If you find your dream home but it’s listed as contingent, you should speak with your real estate agent about making an offer. You should know, though, that not all contingent listings are the same. Some might be designated “Contingent - Continue to Show,” which means the seller is still actively showing and keeping their options open for another, less contingent offer to be made. If you’re in a position to make a non-contingent offer, you might stand a winning chance in this instance.
On the opposite end of the spectrum, others might be designed as “Contingent - No Kick Out.” This would mean that the seller can only entertain other options if the buyer is not able to meet the contingencies outlined in the purchase contract. In this instance, the buyer with the contingent offer is relatively protected from losing the home to another, less contingent offer.
Either way, nothing is set in stone until closing so if you fall in love with a contingent house — go ahead! Make that offer.
By Kate Leggett