What Does 'Contingent' Mean in Real Estate?
When you're buying or selling a house, you'll come across many real estate terms that might sound confusing at first.
One of the most important real estate terms you'll hear is "contingent." In real estate, the word "contingent" signals that a property sale is in progress but not yet finalized. The seller has accepted an offer from a buyer, but certain conditions—known as contingencies—still need to be met before the sale can be officially completed.
Contingencies are like checkpoints in a real estate transaction. They provide safety nets for buyers, giving them the right to back out of the deal under specific circumstances without losing their earnest money deposit. The earnest money deposit is usually a small percentage of the home's price, given by the buyer to show they are serious about the offer. If the sale falls through due to a contingency not being met, the buyer can often recover this money.
Understanding what "contingent" means and how contingencies work is essential for anyone navigating the world of real estate, whether you're buying your first home or selling your property. It helps both buyers and sellers protect themselves and understand what needs to happen to finalize the sale.
What Are Contingencies in a Real Estate Deal?
Contingencies in real estate are conditions written into the contract between the buyer and the seller. These conditions must be satisfied for the sale to move forward. If any of the contingencies aren't met, the buyer has the right to walk away from the deal.
Inserting contingencies into a contract is a way for buyers to protect themselves. They want to make sure certain important steps are completed—like a home inspection or getting approved for a mortgage—before they are legally bound to purchase the home.
Without these protections, buyers could find themselves stuck in a contract without the means to back out, even if they encounter problems with the house or financing.
Here are Some of the Most Common Contingencies You’ll Find in Real Estate Deals:
Home Inspection Contingency: Buying a home is a significant investment, so most buyers want to have the house inspected before committing to the purchase. The home inspection contingency allows the buyer to have the property checked by a professional inspector.
If the inspection uncovers serious issues like a damaged roof, faulty electrical systems, or plumbing problems, the buyer can ask the seller to make repairs, lower the price, or cancel the deal without penalty. This contingency ensures the buyer isn’t stuck with unexpected repair costs after the sale.
Mortgage Contingency: Many buyers need a mortgage or loan to purchase a home. The mortgage contingency gives the buyer time to secure financing for the purchase. If the buyer can’t get approved for a loan, they can cancel the contract and get their earnest money back.
This is a crucial protection for buyers who are relying on a mortgage to afford the home. Without this contingency, a buyer could be forced to proceed with the purchase even if they can’t secure a loan, which could be financially devastating.
Appraisal Contingency: The appraisal contingency protects the buyer by ensuring the home’s market value is in line with the sale price. The buyer's lender will typically order an appraisal to determine the property's value. If the appraisal shows that the home is worth less than the agreed-upon price, the buyer can renegotiate with the seller or back out of the deal.
This contingency prevents the buyer from overpaying for a property, especially if they are borrowing money to make the purchase. If the home’s value comes in lower than expected, the lender may not approve the full amount of the loan, which can cause complications in completing the sale.
Title Contingency: Before any property is sold, the buyer and their lender want to make sure there are no legal problems with the title (ownership) of the home. The title contingency ensures that the property's title is free of liens (legal claims) or disputes.
For example, if someone else claims they own part of the property or if there are unpaid taxes attached to the property, these issues need to be resolved before the sale can go through. If the title search reveals any problems, the buyer can either request that the seller resolve them or walk away from the deal.
Home Sale Contingency: Some buyers need to sell their current home before they can buy a new one. The home sale contingency allows the buyer to back out of the deal if they can't sell their existing property by a certain deadline. This contingency protects the buyer from being forced to own two homes at once, which could be financially overwhelming. If the buyer's home doesn't sell in time, they can cancel the contract and recover their earnest money.
What Does 'Active Contingent' Mean?
You might see a home listed as "active contingent" when browsing real estate listings. This means the seller has accepted an offer, but the buyer still needs to meet one or more contingencies before the sale can close. Essentially, the home is under contract, but the deal isn’t finalized yet.
While the property is marked as "active contingent," the seller can still show the home to other potential buyers and even accept backup offers. This way, if the current deal falls through because the buyer can’t meet one of the contingencies, the seller has other options ready. The "active contingent" status keeps the door open for other buyers, though the primary deal is still the focus.
This status is different from a "pending" listing. When a home is "pending," all contingencies have been met, and the sale is just waiting for the final steps before home closing. The likelihood of the sale going through is much higher at this stage.
What’s the Difference Between Contingent vs Pending?
It’s important to know the difference between "contingent" and "pending" when you're looking to buy or sell a home. These terms describe different stages in the real estate transaction process.
Contingent: When a home is listed as "contingent," it means the seller has accepted an offer, but there are still conditions (contingencies) that need to be met before the sale can be completed.
These contingencies could include anything from the buyer needing to sell their current home to the completion of a satisfactory home inspection. A contingent sale is still somewhat uncertain because there’s a chance the deal could fall through if one or more of the contingencies aren’t met.
Pending: On the other hand, a "pending" listing means that all the contingencies have been fulfilled, and the deal is now moving toward closing. At this point, the buyer and seller have agreed to all terms, and there are no remaining conditions that could cause the sale to fall apart. While it's not 100% guaranteed that the deal will close, it’s much more likely to be finalized when a property is listed as "pending."
Understanding these terms helps you gauge how far along a sale is and whether there’s still an opportunity to make an offer on the property.
Tips for Buyers and Sellers When Dealing with Contingencies
Dealing with contingencies can be one of the trickiest parts of a real estate transaction, but understanding how they work can make the process smoother for both buyers and sellers.
For Buyers:
Know What You Need: Before making an offer, make sure you understand which contingencies are essential for your situation. For example, if you're not confident you'll secure a mortgage, a mortgage contingency is crucial to protect you from financial risks. Similarly, if you’re concerned about the condition of the property, you’ll want to include a home inspection contingency.
Work with Your Agent: Your real estate agent can guide you in crafting an offer that protects your interests while still being attractive to the seller. Agents have experience with the types of contingencies that are commonly used and can help you decide which ones make the most sense for your specific deal.
Be Prepared to Act Fast: Once your offer is accepted, you’ll need to work quickly to meet the contingency requirements. Schedule your home inspection, apply for your mortgage, and complete any other steps promptly so that you don’t delay the process.
For Sellers:
Evaluate Offers Carefully: When reviewing offers, consider both the price and the number of contingencies. An offer with fewer contingencies is less likely to fall apart, but you also want to make sure the contingencies that are included are reasonable. If a buyer includes too many contingencies, it can add complications and delays to the sale.
Be Ready to Negotiate: Depending on the results of contingencies, especially after a home inspection, buyers may ask for repairs, a price reduction, or other concessions. Be prepared to negotiate to keep the deal moving forward, but also know when to stand firm if the buyer's requests are unreasonable.
Successfully Navigating Contingencies in Real Estate
Successfully navigating contingencies is a key part of completing a real estate transaction. For buyers, the focus should be on making sure all contingency requirements are met on time, whether it’s securing financing, completing an inspection, or dealing with any other conditions. Buyers should communicate regularly with their agent and other professionals involved in the process to ensure everything moves smoothly.
Sellers, on the other hand, need to be aware of the risks involved in contingencies. They should stay prepared for negotiations and potential delays, especially if buyers discover issues during inspections or have trouble with financing. At the same time, they should have a plan for backup offers in case the deal falls through.
Understanding how contingencies work is crucial for anyone involved in real estate. Knowing how to handle these conditions can help both buyers and sellers move through the process confidently and work toward a successful sale. With the right approach, contingencies can be managed effectively, ensuring a smoother path to closing and a deal that satisfies everyone involved.