Is it an understatement to say that buying a house can be a complicated process? And that’s before buyers even start thinking about steps like making a contingent offer.
From the moment you make the decision to find a new home, you’re navigating a juggling act of strategy, timing, and luck. Choosing a qualified agent and searching for the perfect home in terms of ideal size, location, price, and condition can already feel like a journey, but making an offer on a property is when the challenge really begins.
The need for a competitive offer is stronger than ever these days, when experts nationwide agree that the events of 2020 have created a robust seller’s market. This means buyers need to come prepared with enticing offers and the capacity to quickly follow through, and nothing can sideline an otherwise stable deal like tricky contingencies.
We’ll review what a contingent offer is and run through a common contingency scenario with the help of Marc Lagrois, a top real estate agent based in Rochester Hills, Michigan, who works with 72% more single-family homes than the average agent in his area. We’ll explore what buyers can do to help strengthen a contingent offer and secure a spot at the closing table.
What is a contingent offer?
As the term implies, a contingent offer proposes a deal that can only be brought to fruition if certain conditions are met. Because the stakes are high when it comes to property transactions, contingencies are written into the purchase agreement, and in most cases, action must be taken toward satisfying those contingencies within a certain time frame.
Contingencies can range from the relatively minor or otherwise workable — like requesting a $3,000 allowance to fix a plumbing issue that was revealed during inspection — to more serious stipulations, such as a buyer needing to sell their existing house before closing on the next.
As you’d likely imagine, some contingencies are negotiable, while others simply are not.
A home inspection contingency lets the buyer back out of the deal or renegotiate if substantial issues come up during the home inspection.
While widely considered a best-practice move when purchasing a house, home inspections have some wiggle room. Cash buyers occasionally forego the inspection process to save time, and buyers coming in with other contingencies may either waive their right to a home inspection or agree in advance to cap their potential request for repairs or allowances as a good-faith gesture toward the seller.
When you use a mortgage to buy a home, your lender will need to order an independent appraisal to evaluate what it’s worth. That’s why financed offers come with appraisal contingencies — the loan can’t clear until the home has been appraised and the lender knows they’re not lending you too much for the home. But if the appraisal comes in low (that is, the home is worth less than your offer amount), it can put your deal with the seller at risk.
It’s difficult to fully circumvent the appraisal process when financing is involved, but these numbers aren’t necessarily a dead end.
“I’ve seen buyers guarantee or partially guarantee the appraisal,” says Lagrois.
“If they’re offering a really high price, maybe even a little over market value, they realize they’re going to have to do something to protect the seller from the possibility that the appraisal will come in low.”
In these cases, buyers make up the difference between the purchase price and the appraisal with cash.
Unless you’re paying cash for a house, your best course of action is to include a pre-approval letter from a mortgage lender with your offer. This indicates to the seller that you’ve been qualified to secure funding, and proves that you’re serious about buying since you’ve already gone to the trouble of talking with a bank.
That being said, pre-approvals aren’t yet a guarantee of funds and they usually carry an expiration date. Plus, you’ll want to include a financing contingency in your purchase contract which states that the home loan has to clear before the deal can close.
So can a financing contingency be negotiable? If you’re obtaining traditional financing, waiving the financing contingency can put your earnest money deposit at risk. One way around a financing contingency could be to apply for a bridge loan or use a service like HomeLight Cash Offer, which makes an all-cash offer on your hopeful home on your behalf. These options turn your financed offer into a cash offer and allow you to eliminate the financing contingency completely.
Needing to sell your house before you can close on your new home is a very common situation, but for the seller of your intended next property, this is a risky scenario. If something jeopardizes your sale, then their deal with you is now also at risk.
Adding a sales contingency to an offer essentially asks the seller to enter into a waiting game with you, and if they happen to also be purchasing a new home while in the process of selling one to you, well, it’s not hard to see how another offer without a sales contingency may look more appealing.
We’ll dig more into how to navigate this contingency shortly.
A settlement contingency is similar to a sales contingency, but in this case, you’ve already found a buyer for your house and you’re just waiting to close. Writing this contingency into your offer usually involves specifying a certain date by which your sale will be settled, whereupon you can move forward with your next purchase.
Should the sale on your current house fall through or even just get delayed, the seller of your would-have-been home can put their property back on the market if you can’t renegotiate a closing date.
Non-negotiable contingencies, on the other hand, can derail or significantly delay a sale.
Title and lien contingencies
Review the detailed settlement document provided by the closing attorney and you’ll see a line item for a property title search. This element of research is done to ensure that the person selling a house is indeed the legal owner of the property with full rights to sell.
If a title search reveals any claims to or liens against the property, the transaction will be delayed until it can be resolved. Claims most often arise from family disputes or divorce proceedings, while property liens can be tied to debts owed to contractors, unpaid taxes, bankruptcy, and more.
Zoning and land use contingencies
If you’re buying a property that is currently used for residential purposes and you plan to continue using it as a residence, you probably won’t be troubled by zoning contingencies, but it’s worth being aware that changing the use of a property often requires proper approval and permitting—both of which go beyond what a buyer and seller can agree on amongst themselves.
Short sale or bank approval contingencies
If you’re purchasing a home that is considered distressed or is otherwise bank-owned, you’ll find far less room to negotiate the fine points than if you were working directly with a private seller.
Court approval contingencies
Like claims against property titles, contingencies requiring the approval of a court to move forward occur most frequently in cases of divorce settlements and estate sales.
Sweetening the deal when a contingent offer is inevitable
Now, let’s hone in on the common contingency of needing to sell your current home in order to buy your next property. When you’ve found the home of your dreams in a competitive market, how can you make your offer as enticing as possible to a seller who is likely fielding offers left and right?
“If you’re writing an offer that is going to be contingent on the sale of your home, you have to show that you’re serious about getting that house sold,” says Lagrois. “You have to demonstrate that it’s priced to sell and that it’s going to be marketed effectively.”
This scenario is when it’s especially helpful to have a seasoned real estate agent in your corner. Since the agent helping you buy your next home is also likely to be the agent selling your current property, it’s important to work with someone who has the experience to anticipate needs and field concerns on both sides.
“A smart agent is going to be able to demonstrate that their buyer is very serious,” Lagrois says of the offer-writing process. “An inexperienced agent is going to have a tough time navigating through that kind of deal.”
It’s time to get creative
So you’ve found a great agent, they’ve helped you price your home appropriately, and together you’ve created a solid, provable marketing plan; now what?
As the old saying goes, money talks. Coming in with an offer that is at or over asking price is one way to grab the seller’s attention. From there, consider using a little creativity to sweeten the deal.
“I’ve seen buyers doing things like offering free occupancy after closing to make their offer more attractive,” notes Lagrois.
While most home sales require the seller to have vacated the property by closing day, offering extended occupancy allows a buffer of additional time before the seller has to be out. This can work to the advantage of both parties by alleviating time pressure to pack up and move, so consider keeping this handy tool in your negotiation arsenal.
Another uncommon but potentially helpful option is to offer to write a kick-out clause into your contract for the seller. This means that the seller retains the option to accept a better offer if one comes in while their transaction with you is still in progress.
If this sounds risky for you, that’s because it can be! But if you’ve fallen head-over-heels for a particular home to the point where you’re willing to offer a kick-out clause, build in protection for yourself and be sure that the verbiage includes a first right of refusal for you as the buyer. Meaning, if the seller wants to accept another offer, you’ll have up to 72 hours to remove some contingencies from your contract so that it’s more attractive to the seller and you can still move forward with the purchase.
Still feeling stuck? Let HomeLight Cash Offer lend a hand
Since nothing usually beats a cash offer, for ultimate buying power in a seller’s market, consider using HomeLight Cash Offer to purchase your next home with fewer major contingencies.
HomeLight Cash Offer works by verifying your assets and income to ensure you qualify, then HomeLight will make an all-cash, fast-closing offer on your preferred house on your behalf. In the meantime, you can secure financing, all without the stress of potentially losing that perfect new home. (If you’re a current homeowner and trading up, HomeLight Trade-In can help you eliminate the sales contingency and other big contingencies, plus give you a guaranteed price on your current house.)
Once your loan closes, HomeLight Cash Offer sells the home to you at the same purchase price — plus a program fee based on the purchase price — and then it’s time to move in!
The road to the closing table
No matter how you choose to navigate your contingent offer, remember the importance of transparency and urgency. When a seller has accepted your thoughtful (and perhaps rather clever) offer, it’s time to kick into overdrive and get things done.
“Buyers have to be willing to move forward with their due diligence right away,” says Lagrois. “Sitting around and waiting is definitely not in anybody’s interest.”
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