What Is A Contingency Sale
There are many stages to buying or selling a home. For sellers, the process begins when you first decide to sell and start readying your home for inspections, appraisals, and viewings. For buyers, it begins when you start looking at listings, considering your funding options, and visiting potential properties.
Once offers are made and negotiated, buyers and sellers alike may find themselves faced with what’s known as a contingency sale. What is a contingency sale?
In a sense, the phrase is fairly self-explanatory. A contingency sale is one that is contingent, or dependent upon, certain outlying factors. However, there are a few more layers we’ll need to peel back to understand a contingency offer fully.
Keep reading to learn all you need to know about real estate contingency sales. If you’re also wondering, “what is a bridge loan” and how can it help your home buying journey, we’ve got you covered!
What does “contingency sale” mean?”
In real estate, a “contingency sale” is one where an offer has been accepted on a property but, before the sale and purchase agreement of the home buyer are finalized, certain conditions, known as “contingencies,” must be met. In other words, the sale to the potential buyer is determined by the satisfaction of the terms of the real estate contract.
Although the terms of the real estate contract are agreed upon by both the potential buyer and the existing home seller, the contingencies themselves are almost always in place to protect the buyer. Among other provisions, real estate contingencies help ensure that:
The property is at a fair market purchase price
The property is structurally sound through home inspection contingency
The buyer can secure funding for the sales contract
What are the most common contingencies?
The contingencies in a given purchase contract can cover many things, from the structural integrity of the property to the buyer’s availability to secure funding. That’s why so many buyers and sellers choose to work with a qualified real estate agent.
That said, most home buying contingencies fall into one of the three main categories:
Appraisal contingencies
Inspection contingencies
Loan contingencies
What is an appraisal contingency?
If a home contract carries an appraisal contingency, it means that the buyer will only finalize the sale if the property is valued at the asking price. This is one of the most important clauses for the buyer, as it gives them the opportunity to verify independently that the asking price is fair.
Let’s say you’ve put in an offer on a house for an asking price of $750,000. If your contract includes an appraisal contingency, it means that you agree to buy the house only if an appraiser values it at $750,000 (or more).
Under an appraisal contingency, it’s customary for the buyer to hire their own appraiser to determine the value of the property. To calculate this, the appraiser will perform an inspection that includes:
Evaluating the inside and outside of the property
Verifying the total square footage
Assessing the property’s features and amenities
Comparing the property to similar, recently sold properties
If the house is appraised at or above the asking price, the appraisal contingency is removed from the contract and the sale continues.
However, in the event that the appraisal is less than the asking price, the buyer is free to re-negotiate the deal or cancel it altogether. In that case, the contingency allows the buyer to recoup any deposits or other payments they’ve made.
What is an inspection contingency?
Inspection contingencies state that the buyer will only go through with the deal if the property passes a professional general inspection. While an appraisal inspection determines whether the property has been accurately valued, a general inspection assesses the structural integrity of the property.
For residential properties, the buyer hires an inspector to assess the quality of the home. During a general inspection, inspectors look for issues with:
The foundation – Inspectors check for structural issues to make sure that the foundation is sound and strong. They’ll also check the foundation for safety, which can be a major deal-breaker when it comes to finalizing a sale.
Drainage – Inspectors will check the home’s drainage systems to make sure that the home isn’t susceptible to flooding or other issues. In most cases, this involves verifying that the house is pitched slightly higher than street level so that water drains away from the home. They’ll also check the gutters, gutter elbows, and downspouts.
Mold – Aside from the effects it can have on your health, mold is a sure sign of previous water damage, which is why inspectors look for it when assessing a property.
Termites – Certain pest infestations, like termites, can cause expensive damage to a home. Termite tenants are considered a big red flag when it comes to inspection reports.
The electrical system – Inspectors will also evaluate the condition and quality of the home’s electrical system. They’ll check that the wiring system is safe, up-to-date, and capable of handling the electrical needs of a modern family.
Not every issue revealed in an inspection report is necessarily cause for canceling the deal. In some cases, an inspection report might include:
Fixable issues – These are typically smaller, easily remedied issues that can be taken care of by the seller before the deal is finalized. Credits may also be issued to the buyer to cover the expenses of making these repairs.
Upgrades – Inspectors are picky by nature, so their reports often include suggestions that aren’t strictly necessary. These are considered upgrades. Suggested upgrades on an inspection report are rarely reason enough to cancel a sale. When they occur, it’s usually up to the buyer to make the changes.
What is a loan contingency?
A loan contingency (or financing contingency) stipulates that the buyer has a certain amount of time to secure a mortgage in order to buy the property. If the buyer fails to secure financing within a certain time frame, the sellers are free to cancel the deal and look for another buyer.
Although loan contingencies are beneficial to most home buyers, they can make your bid less competitive. Understandably, offers that come with financing already arranged tend to be more attractive to sellers. To hurtle this obstacle, consider:
Getting pre-approved for financing
Paying cash
Are there other types of contingencies?
Although appraisal, loan, and inspection contingencies are the most common types of contingencies in real estate, you may encounter a couple of additional ones as well. In some cases, the following contingencies may also apply:
Title contingencies – This contingency verifies that the property title is not subject to any liens or other discrepancies, such as boundary disputes or third-party claims, among others.
Home sale contingencies – In situations where the buyer is already a homeowner, they may stipulate a home sale contingency. In this case, the deal relies upon the buyer’s ability to sell their current home.
Circumstantial contingencies – In some cases, contracts include circumstantial contingencies. For example, in areas that are prone to flooding or other natural disasters, insurance contingencies may apply. Recently, contingencies that respond to the COVID-19 pandemic have also become prominent.
Contingency sales vs. pending sales
If, like many people, you have only a loose grasp on the various terms of real estate lingo, it’s easy to get confused by the differences between contingency sales and pending sales. After all, isn’t a contingency sale also pending, in a sense? Yes and no.
While a contingency sale refers to sales that are contingent upon the fulfillment of certain contractual obligations, a pending sale refers to a situation where an offer has been accepted, a contract signed, and all contingencies have been met, but the deal isn’t officially closed.
When a sale is in pending status, it’s officially off the market and the seller can’t legally sell it to another buyer. At this point, only the buyer can cancel the sale.
Contingency sales: what sellers should know
From the standpoint of property sellers, contingencies in sales contracts can feel like just another real estate hoop to jump through. However, even if it seems like contingency mostly benefits the buyer, they also help sellers get the best deal for their house.
This is good news for sellers. Fortunately, certain time-tested methods for readying your home for sale can also benefit you when it comes to navigating contingency periods.
That’s why it’s so crucial that owners do the necessary leg work to get their properties up to standard before putting them on the market. You’ll still have to deal with contingency sales and pending periods, but preparation will help you navigate those waters with more finesse.
To make future contingencies more manageable, sellers should:
Get a home inspection – While prospective buyers will still likely include an inspection clause in their contract, you’ll have an easier time anticipating and managing the results of the inspection report if you have your own. This also allows you to make repairs before putting your house on the market.
Get an appraisal – Pricing your home above market value is one of the biggest mistakes home sellers can make. Having your home appraised by a reputable appraiser can help quicken the selling process and ease your mind when potential buyers bring in their own appraisers.
Be willing to negotiate – For sellers, it’s important to remember that you don’t have to accept offers with too many contingencies or contingencies that you don’t agree with. That said, it’s common for sellers to negotiate contract terms with regard to repairs, pricing, or closing timelines.
As a seller, you may be wondering how often contingent sales fall through. Unfortunately, current numbers regarding the percentage of contingency sales that end up canceled aren’t readily available.
That said, canceled home sales are considered a relatively infrequent occurrence. Working with a licensed qualified realtor and hiring respected inspectors and appraisers are a couple of ways sellers can avoid common pitfalls of canceled contracts, like overpriced properties and or an abundance of repairs.
Contingency sales: what buyers should know
If you’re on the buying end, contingencies work mostly in your favor. They’re designed to protect you throughout the real estate buying process and ensure that you don’t buy a home that turns out to be a bad investment. As a buyer, contingency clauses also:
Protect your escrow deposits
Protect you from legal action if the deal is canceled
That said, as a buyer, you’ll mostly be responsible for making sure the various terms of your contract are met. From hiring inspectors and appraisers to getting approved for a mortgage, most contingency terms require action on the buyer’s part.
To that end, here are a few tips for navigating your duties and making the most of your contingency period:
Choose the right inspectors – Whether you’re verifying the structural soundness of a home or making sure it’s priced correctly, choosing a top-notch inspector is crucial. Check Angi, Yelp, and other reputable websites for customer reviews. Checking their licensing, being present during the inspection, and knowing what’s included in the inspection process are all very important steps.
Start mortgage hunting early – Securing the financing of a new home can be a lengthy process. That’s why it’s advisable to start checking out several options before you start house hunting.
Save your money – Although many contingency clauses are designed to save property buyers money in the long run, they can run up quite a steep tab in the meantime. Before you place an offer on a home, be ready to account for inspection fees, appraisal fees, and other hidden real estate expenses.
Consider how many contingencies a contract should include – For buyers, it’s best to limit the number of contingencies in your contract to one or two. Although they’re a common part of real estate, including too many contingencies can make you a less attractive candidate for sellers who want a quick and seamless sale.
Berkshire Hathaway HomeServices California Properties: your contingency experts
Contingency sales are common practice in real estate. Whether you’re buying or selling, knowing the ins and outs of the process is a necessary step toward entering deals that satisfy both parties.
That said, contingency sales are only one facet of the many-sided diamond that is real estate. That’s why you need a trusted advisor in your corner to help you through every step of the process. Our trusted advisors can also help you understand amortization in real estate as well as acceleration clauses in real estate.
For those trusted advisors, turn to California Properties. I can help you navigate the entire buying and selling process, including putting your home on the market, negotiating offers, and managing contingency sales.
Sources: US News
