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What does contingent mean in real estate?

The word ‘contingent’ or ‘contingency’ literally means that there is a condition written into the contract. Only when such a listed condition is met, the agreement is considered to be legally binding. In real estate a contingent offer means that an offer on a new home has been made and has been accepted by the buyer too, but the final sale is contingent on certain conditions which have to be fulfilled. If anything goes wrong during the process of purchase, the buyer can back out, without losing their money deposit.

Types Of Contingencies In Real Estate

There are four types of contingencies in real estate.

  1. Financing: A Financing contingency is the most common type. It implies that if the buyer faces trouble getting a mortgage on the home purchase, he can back out from the contract without having to face any penalty.
  2. Home sale: Under this contingency, the present homeowner can make an offer on a new home which is contingent on the sale of their old house. This is useful in avoiding the risk of overlapping of payment and also in raising the chances of getting approved for a new mortgage.
  3. Appraisal: This contingency facilitates the buyer to renegotiate the purchase price or withdraw from the contract if the appraised value of the house is lower than its purchase price. The importance of this contingency stems from the fact that the mortgage lender does not lend more than the value of the house.
  4. Inspection: This contingency lets the buyer gets the house inspected by a professional, after putting down earnest money and before completing the sale. If any issues are found in the house, the buyer can request it to be fixed by the seller, else cancel the contract.

Importance Of Including Contingency In The Offer By A Buyer

Contingencies safeguard the interest of the buyer in different circumstances that are beyond the control of the buyer and can cause financial strain on him. They allow the buyer to protect their rights and even withdraw from the contract if their interests are harmed.

Benefits Of A Buyer’s Contingency To The Seller

The primary benefit to the seller, of accepting a contingent offer is that it indicates that a sale is in process on the house. As per a report from the National Association of Realtors, only seven percent of home contracts are canceled after the offer has been accepted, the reason behind them being the contingencies, financing of the property, etc. 

Risk Involved In Contingent Sale Real Estate Offer

A rare few sellers are fortunate enough to receive an all-cash, contingency free offer. However, most of the purchase offers related to houses include certain contingencies best suited to the buyer. Up to the point where the transaction is closed, there is always a risk involved.

An offer without an inspection can bring forward defects after the deal has been closed. These defects could have been easily negotiated before the transaction was complete. Additionally, contingent sale buyers are usually ready to pay more when compared to non-contingent buyers to entice sellers to their contingency offers.

Sellers who enter into a contingent offer can add a clause to the contract allowing them to continue marketing their home for a back-up offer, thus benefiting them.