During your home search, you may encounter a variety of different “statuses” of a listing, including pending, under contract, or contingent. What does contingent mean? Merriam-Webster defines the word as “dependent on or conditioned by something else.” But what exactly does it mean in the context of real estate?
When a home is listed as “contingent or pending,” it means the seller and buyer have reached an agreed-upon offer, but before the deal is finalized, certain criteria must be met. In other words, the sale is contingent upon certain conditions. This could mean that the home inspection or appraisal must produce certain results, the buyer must get confirmation of financing, or the buyer needs to be able to sell their current home.
Most contingencies are favorable for the buyer, as opposed to the seller. In fact, in an ultra-competitive market, a seller may skip over an offer with contingencies in place, as they have the luxury of choosing from several other enticing offers without strings attached.
On the other hand, home inspection contingencies protect the buyer’s liability significantly, as it allows for the home inspector to discover defects that would compromise the value of the home. So it may be worth proposing a contingent offer — especially if you are uncertain or wary about the home’s condition.
Using expert guidance from Robert Murphy, Principal Broker with Armstrong Real Estate, let’s explore the several types of contingencies in real estate, and some of the benefits and downsides associated with each.
Home Sale Contingency
In order to avoid being stuck owning two properties at once (and therefore paying two mortgages), a buyer may have to include a home sale contingency, which means their current home must sell in order for them to qualify for the purchase of a new home. This may be necessary in order to have a decent amount of cash on hand for the down payment and closing costs. If they don’t include a home sale contingency, the buyer would be misrepresenting their financial situation. Keep in mind that in a seller’s market, this type of contingency may be frowned upon by the seller, who can just find another buyer not in this financial predicament. In lieu of this contingency, a buyer might consider a bridge loan, which is a short-term loan pending the arrangement of longer-term financing.
Home Inspection Contingency
A home inspection contingency means the sale of the home is contingent on a home inspection that doesn’t uncover any major issues with the home. This could include roofing problems, plumbing issues, electrical problems, structural issues, and other major findings.
These issues could be grounds for a renegotiation of the sales price or allow for an agreement to be made over who will be responsible for these repairs. Or it may give the buyer the opportunity to back out of the sale completely. Keep in mind that just because issues are found, this doesn’t necessarily mean the deal will always fall through! Depending on the severity, the buyer and seller may come to an agreement on a path forward. The contingency just gives you the flexibility to have those conversations if unforeseen issues do arise.
It’s also important to have a home inspector you can trust, who will explain the issue(s) in detail, including the estimated cost of repair and just how serious the problem is. Here at Magnolia Home Inspections, we are dedicated to protecting home buyers in the Nashville area by preparing them for successful purchase negotiations and educating them for successful long-term home ownership
Also known as a mortgage contingency, a financing contingency allows buyers to cancel the contract of the purchase with no penalties if they are unable to secure financing from a lender. It is in place from the binding agreement date all the way to closing day. If a buyer has this contingency in place and is unable to obtain financing before closing day, they can terminate the contract and even receive their earnest money back. They will want to take extra care of their finances during this time by not taking on any debt, losing or switching jobs, etc.
An appraisal contingency means the sale is contingent on the appraisal confirming that the contract price is comparable to its value. This ensures a buyer isn’t overpaying for a home. And it comes down to the fact that the lender does not want to give a loan for an amount way above the home’s actual worth. In a hot real estate market, meeting the appraisal number can be difficult, but there are some ways around it. If you have cash on hand to make up the difference, you can work around the appraisal and purchase price not matching up.
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