Contingent means that a seller has accepted an offer from a prospective buyer, but certain conditions must be met before the offer goes through.
As a real estate agent, it’s essential you understand the types of contingencies and how to manage them. So let’s take a deep dive into this subject – including the typical timelines of contingencies and how to use them in the negotiation process.
Defining Contingencies in Real Estate
A contingency is a clause that both buyers and sellers might include in the contract. It allows them to back out of the transaction if certain conditions aren’t met.
You will be representing both buyers and sellers throughout your career as a real estate agent, so you need to be able to explain how each type can affect a real estate transaction.
Types of Contingencies
There are four common types of contingencies in real estate: contingency for sale, contingency for financing, contingency for inspection, and contingency for appraisal. Here’s how each type works for buyers and sellers.
Contingency for Sale
A sale contingency is frequently included in real estate contracts.
There are two different types of home sale contingencies – sale and settlement contingency and settlement contingency.
A sale and settlement contingency is used when the buyer has not accepted an offer for their current home – but wants to make an offer on a new home.
Usually, the sale and settlement contingency allows the seller to keep showing their home to other potential buyers. And, if another buyer makes an offer, the seller can give the original buyer 24 to 48 hours to remove the contingency on their initial offer. The property will be sold to the new buyer if the original buyer cannot remove the contingency.
A settlement contingency is used when a buyer has accepted an offer on the home they are currently selling. This contingency will protect the buyer in case the sale of their current home doesn’t go through.
Typically, this type of contingency won’t allow the seller to entertain offers from other buyers. The contract will remain valid as long as the buyer’s home closes on the date listed in the contract.
A sale contingency period is typically 30 to 90 days.
Contingency for Financing
A contingency for financing (also called a mortgage or loan contingency) is a clause that allows buyers to get out of a purchase contract without paying a penalty if they cannot secure a mortgage for the purchase. In addition, the buyer would receive their earnest money back.
A loan contingency period is typically 30 to 60 days.
Contingency for Inspection
An inspection contingency (also called a due diligence contingency) gives the buyer the right to have the home professionally inspected. The potential home buyer is given a specific amount of time to have a professional inspection, after which they may negotiate repairs or cancel the contract.
A contingency for inspection period is typically 7 to 10 days.
Contingency for Appraisal
Lenders require appraisals to ensure the home isn’t selling for more than it’s worth. Three things could happen if the mortgage company’s assessment shows the property isn’t worth the contracted price.
- The seller could lower the sale price.
- The buyer could come up with cash to cover the difference between the appraisal amount and their offer.
- The buyer could back out of the sale without losing earnest money – if they have a contingency for appraisal written into their contract.
A contingency for the appraisal period is typically 10 to 14 days. (Buyers should ask their lender how long it may take to schedule an appraisal for the property before giving a specific timeline in the contract.)
How to Manage Contingencies
Now that you understand the four common types, here’s some advice on using contingencies to negotiate a better deal for your buyers or sellers.
Managing a Contingency for Sale
In a hot market, a seller is less likely to accept a contingency-for-sale deal. Therefore, if the buyer has to submit an offer with a home sale contingency, consider advising them to offer a higher price and eliminate all other contingencies (or both!)
[Read More: 3 Tips to Make Sure Your Offer Will Be Accepted]
Managing Contingency for Financing
First-time homebuyers are more likely to add a contingency for financing in their contract. However, the buyer must realize that adding this contingency may reduce the owners’ likelihood of accepting their offer.
It’s also important to note that conventional loans win over FHA loans when a buyer has multiple offers. (And, of course, cash is king.)
Some real estate agents protect their clients by writing into the contract that the buyer has the right to change financing terms – as long as it doesn’t cost the seller any more money.
Managing a Contingency for Inspections
According to the February 2023 report from the National Association of REALTORS®, 22% of buyers waived the inspection contingency. However, a contingency for inspections would allow them to back out of the purchase – without losing their earnest money – if something is uncovered during the inspection.
[Read more: How to Prepare Your Buyers for Today’s Hot Market]
If your client insists on inspections, you may recommend that they request a reasonable inspection contingency period – with the expectation that the sellers will NOT pay for the repairs.
Or, you may recommend that your buyer asks for a pre-offer inspection. Then, if they find issues with the home, they may choose to walk away from the property before making an offer.
However, a seller may not accept such conditions. If an inspection uncovers problems, the seller must disclose them legally.
Managing Contingency for Appraisal
If your buyer is putting an offer in for a home that’s at the top of their price range, they may want to add a contingency for appraisal.
If the appraisal comes back lower than expected, it may motivate the seller to lower the price of the home – while still giving a way out for the buyer if a deal can’t be reached.
However, this strategy may not work in a hot market, as sellers are more likely to accept an offer without any contingencies.
Of course, waiving the appraisal contingency can be risky for your buyer. If the appraisal comes in lower than expected, they may have to come up with thousands of dollars out of pocket – or risk being in breach of contract.
[Learn more about appraisal waivers by reading, Should Your Real Estate Client Sign An Appraisal Waiver?]
Contingent means that a seller has accepted an offer from a buyer – but that certain conditions must be met before the offer goes through.
There are four common types of contingencies: contingency for sale, contingency for financing, contingency for inspection, and contingency for appraisal.
Sellers are more likely to accept offers from buyers without contingencies in their contracts.
A savvy real estate agent can help protect their clients by encouraging the use of contingencies.
Learn More by Enrolling in Continuing Education Courses with Colibri Real Estate
Get the most up-to-date information about negotiating contingencies by enrolling in a continuing education course with Colibri Real Estate .
Our courses can be used toward your license renewal and help you become a better negotiator for your clients. And, when you’re ready to advance your career, you can depend on Colibri to help you study for your real estate broker license.
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