Sooner or later in your home sale journey, you’ll hear the term “contingent.” There are contingent offers, contingent listings, home sale contingencies, appraisal contingencies, financing contingencies, and so on. So what does “contingent” really mean?
In real estate, “contingent” is a status indicating that the seller has accepted a buyer’s offer that includes contingencies, or in layman’s terms, specific requirements that must be met for the sale to close. If the buyer is unable to meet the contingencies, then they can back out of the agreement with their earnest money in hand. Since this scenario would boomerang your home sale back to square one, it’s safe to say that the word “contingent” is not your friend.
“You have to understand that all the way until the very last day before we close on your house, the buyer can cancel. And most likely, the way most of our contracts read, they could get their deposit back . . . So it’s just an added risk that’s not worth it unless the price really makes sense,” says top real estate agent Liz Donnelly, who closes 17% more sales than the average agent in Ventura, CA.
We’ll get you up to speed on contingencies and help you navigate your best course of action when you receive a contingent offer on your home.
What are the most common contingencies?
According to the National Association of Realtors’ (NAR) latest Confidence Index Survey, 76% of offers included contingencies in May 2020. Here are the four most common contingencies in real estate contracts:
Buyers often want a home inspection to protect their interest — they want to lift the hood of the car so to speak before they commit to buying. Buyers can also use the home inspection report as leverage to negotiate a better deal, asking you to complete repairs or offer repair credits. If you refuse and you can’t come to an agreement, they’re free to walk away.
It’s standard for lenders to require a home appraisal to ensure they aren’t lending more than the property’s fair market value. With an appraisal contingency, your home must appraise for an equal or higher value than the buyer’s offer for the sale to close. If the appraisal comes in low, you’ll need to negotiate a lower sale price, ask if the buyer can make up the difference in cash, or challenge the first appraisal if there’s reason to believe it was flawed.
Also known as mortgage contingency, the financing contingency states that the buyer can back out of the deal if they can’t get their loan to go through. According to NAR, 86% of buyers financed their home purchase in 2019, making this contingency incredibly common. Still, it can cause major headaches with surveys indicating that 35% of closing delays are due to buyer financing issues. If you have the choice between a mortgage backed or cash offer, cash is king.
Home sale contingency
Home sale contingency means a buyer’s purchase of your house is contingent on their own house selling. In other words, the deal will only go through if and when the buyer’s home sale closes, putting your home sale in limbo. A home sale contingency threatens a deal like no other: the fate of your home sale rests on your buyer’s buyer pulling through, an event you have no control over.
Should I accept an offer with a home sale contingency?
Due to their risky nature, Donnelley recommends approaching a contingent offer with caution:
“If the buyer hasn’t accepted an offer on their house, it’s in our best interest as the sellers to keep that interested party engaged, but tell them that we’d love to see their offer once they accept an offer on their house. There’s really no reason to tie up the sale of your home while you’re waiting for somebody else to sell their home in case something better comes along in the meantime.”
She also suggests touching base periodically to see if they’ve made progress on their home sale. This way, you maintain a positive relationship in case you decide to circle back to their offer.
Can I negotiate a contingent offer?
Yes! In real estate, everything is negotiable. If you decide to accept an offer with a home sale contingency, negotiate the terms in your favor first by adding a kick-out clause. This clause states that you can continue marketing your home, and if you receive a better offer, you can cancel the contingent offer to pursue it.
Usually, you’re required to provide the buyer with notice (such as 72 hours) to give them a final opportunity to remove their contingency and close. If the current buyer is unable to lift their contingency in time, you can terminate the agreement, return their earnest money, and start negotiations with the next buyer.
In California, the seller and buyer must complete a contingency form to ensure both parties are on the same page. Donnelly explains how the state’s home sale contingency form outlines the terms of the agreement:
“Our California Association of Realtors forms are great. I mean that they’re like math questions compared to writing an English essay where you can look at it differently. Your choices are pretty black and white. One is, do we have the right to basically kick out this buyer should we receive another offer? Or are we obligated to each other for the extent of our contract, or for a given period of time, say 17 days?”
Aside from home sale contingency, you can negotiate to remove other contingencies depending on if the buyer is backed by a lender or cash. For instance, though a lender-backed buyer will need an appraisal, a cash buyer may remove an appraisal contingency if they’re confident in the home’s value or simply because they want to secure their dream home when competing against other offers. If you’ve proactively obtained a pre-listing home inspection, then you might convince a buyer (cash or lender-backed) to waive an inspection contingency to speed up the sale.
If I accept an offer with contingencies, what happens to my listing status?
When you accept a contingent offer, your agent will update your listing status to indicate that your home sale is in progress, but not yet final. With a contingent listing or a pending listing status, you signal that prospective buyers can still make offers on the property in case the deal falls through, unless specified otherwise (ex. Contingent – No Show/Without Kick-out). Bear in mind, you can’t just ditch your first buyer the minute a higher offer comes in; the first contract would need to fall through legitimately before you accept a back-up offer.
This status lets buyers know you’ve accepted an offer with contingencies. Your home is still an active listing, so you continue showing your home and collecting offers from other prospective buyers. With this active status, days on market will continue to accrue, as well.
When a sale is on hold due to contingencies, the contingent listing status is preferred to the more general under contract status, since it signals to buyers that they can submit a stronger offer if it’s contingency-free. If your buyer satisfies all contingencies, then you can change the listing status to pending or to closed (depending on your state’s definition of pending).
Depending on your state, a pending listing status can mean that you have accepted an offer and are still negotiating or waiting on unfulfilled contingencies, or it can mean that you have accepted an offer and only need to complete the final paperwork and closing. With this status, your listing is no longer active, so your days on market will stop accruing. However, you can still accept backup offers from prospective buyers.
If possible in your state, Donnelly recommends changing your status to ‘pending listing’ instead of ‘contingent listing’:
“Usually, I like to change it to pending no matter what type of pending it is — if it’s pending because it’s a straightforward offer or if it’s contingent on the sale of a home — because that will stop the days on market from counting. Then we have an agent remark section in all of our local MLSs where we can write things to each other, so we can say ‘the buyer backed out — no fault of property’ if needed.”
How can I best protect my home sale from contingencies?
The best way to avoid contingent offers is to sell your home to a cash buyer. Cash buyers are ready and willing to pay for your home today without the hindrance of third party involvement. Without a lender, cash buyers do not require financing or appraisal contingencies. They may also agree to waive the inspection contingency, especially if you’ve already completed a pre-listing inspection.
As we mentioned previously, cash buyers are few and far in between, accounting for only 14% of purchases last year. An alternative route is to sell your home off-market to an iBuyer, house-flipper, or buy-and-hold investor. When you sell your home off-market, you breeze through closing, passing appraisal and buyer loan approval. Some off-market buyers purchase your home “as is,” while others require a home inspection.
Compare your iBuyer options with HomeLight’s Simple Sale platform to ensure your best home sale possible. We’ll gather offers from our network of pre-approved cash buyers and introduce you to the highest bidder in 48 hours or less. If you decide to accept an offer, you proceed to closing a certain sale, concluding with a move-out date of your choosing.
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The bottom line for sellers: contingent equals risk
As a seller, see “contingent” as a red flag — it signals uncertainty and delays. An offer with contingencies can still be a great offer that leads to a sale, but as Donnelly remarks, “you’ll definitely lose sleep during the transaction process.”
Header Image Source: (Stephen Leonardi / Unsplash)