Before receiving the keys, certain conditions must often be met. (Image via Pixabay)
During the highly active market of 2021 to early 2022, buyers looking for an edge in multi-offer situations started to sign home-purchase agreements with exceptionally few contingencies. The reasoning was simple. Sellers are more likely to accept offers with few or no contingencies (i.e., conditions that must be met before a sale can close). As the market continues to fluctuate, contingencies are back on both the seller and buyer sides of the market. This article examines the many meanings of “contingent” in real estate and why contingencies matter.
Defining Contingent
Both sellers and buyers typically write at least some contingencies into their home-purchase agreements or contracts.When you’re searching for property listings as a buyer, a “contingent sale” is a property that already has an accepted offer but is still being treated as an active listing in case one or more contingencies aren’t met (e.g., the buyer can’t come up with the required financing). Notably, a contingent sale is not the same thing as a pending sale. Once a sale is pending, it means that all the contingencies in the home-purchase agreement have been met, and the sale is on its way to closing.
Whether the contingency clause has been added by the potential buyer or seller, contingency clauses hold the same basic purpose—to ensure buyers and sellers can back out of the deal if and when required.
Seller Contingencies
Seller contingencies tend to be rarer than buyer contingencies because placing many contingencies on a sale typically dissuades potential buyers and can make it more difficult to achieve a fast sale or a top price on one’s property. That said, there are still a few contingencies commonly adopted by sellers. A common seller contingency is the so-called “kick-out clause.” In this scenario, a seller accepts a contingent offer but adds their own contingency clause that enables them to continue showing their property to other potential buyers. If another buyer makes an offer without contingencies (or with fewer contingencies), the seller can legally reject the original offer and avoid any risks associated with the contract’s contingencies.Buyer Contingencies
The majority of contingencies are put into contracts by buyers, or more precisely, by buyers’ attorneys. There are many potential contingencies that can be written into home-purchase agreements, including the following:- Home sale contingency: This contingency ensures that if a potential buyer can’t sell their current property first, the home-purchase agreement will be canceled.
- Home inspection contingency: This contingency ensures that the potential buyer will be given access to the home and be permitted to carry out a home inspection and further ensures that if there are any serious problems with the home that were not already disclosed by the seller, the sale can be canceled. That said, even when undisclosed problems are found during an inspection, the sale may still go through. In many instances, the seller agrees to cover the cost of the required repairs instead.
- Mortgage or Financing Contingency: A mortgage or financing contingency ensures that the potential buyer won’t have to go through with the sale if they are unable to secure financing for the home.
- Appraisal Contingency: Another common contingency is related to appraisals. In essence, this contingency ensures that if the home is worth much less than the sale or offer price, the potential buyers have the option of backing out without penalty.
- Title Contingency: In rare cases, a title search will discover that someone other than the apparent seller has title to the home in question (in most cases, this is because someone has placed a lien on the home). In some cases, the problem is even more complex (e.g., an unresolved estate issue). Either way, if you have a title contingency and the title search doesn’t come up with a “clean title,” this clause ensures you can back out of the deal without consequence.
When to Question Contingency Clauses
It is rare for a purchase agreement to have no contingency clauses. In fact, most real estate contracts primarily comprise contingency clauses. As such, there is no need to fight every contingency that ends up in a home-purchase agreement. That said, there are types of situations in which contingencies may raise red flags.As a seller, expect potential buyers to attempt to add as many contingencies to the home-purchase agreement as possible, but this doesn’t mean you have to accept every proposed contingency. For example, if a contract includes a home sale contingency clause, but the potential buyer has yet put their home on the market or listed it well above its market value, it may be a good reason to push back. After all, if a buyer insists on a home sale contingency but doesn’t appear to be trying to sell their home, there is strong reason to believe they may simply be speculating and wasting your time.
As a buyer, it is nearly always in your best interest to push for the inclusion of as many contingencies as possible. In fact, failing to do so can put you at risk. After all, if you’ve signed a purchase agreement and can’t come up with financing or decide to back out for another legitimate reason, these contingencies are usually the only thing that protect you from losing your entire down payment in the process. As a buyer, it is also important to be wary of some seller contingencies, including “kick-out” clauses that give sellers the right to keep accepting offers until the sale is pending. After all, the last thing you want to happen while you’re waiting to be approved for financing, which can take two to three months, is to have a buyer with fewer contingencies (e.g., a buyer coming in with a cash-only offer) kill your deal.
Contributing Writer
Cait Etherington
Cait Etherington has over twenty years of experience working as a journalist and communications consultant. Her articles and reviews have been published in newspapers and magazines across the United States and internationally. An experienced financial writer, Cait is committed to exposing the human side of stories about contemporary business, banking and workplace relations. She also enjoys writing about trends, lifestyles and real estate in New York City where she lives with her family in a cozy apartment on the twentieth floor of a Manhattan high rise.
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