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!
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 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:
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:
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.
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:
Not every issue revealed in an inspection report is necessarily cause for canceling the deal. In some cases, an inspection report might include:
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:
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:
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.
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:
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 real estate agent 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.
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:
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:
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. Our expert real estate team can help you navigate the entire buying and selling process, including putting your home on the market, negotiating offers, and managing contingency sales. Visit a location near you today.
Sources: US News, US News, US News, US News, US News, US News, US News, US News
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July 6th, 2022 at 11:00 am