A lot of things go into buying or selling a home. In addition to the intricacies that come with it, you get to deal with properties bearing several different statuses in the housing market. In a nutshell, behind the “For Sale” sign, there are several terms you should expect when looking to close on your dream home. A typical example is the term “contingent clause.”
The contingent clause is part of every real estate agent’s vocabulary and is often used to describe the current buying conditions. It comes with some benefits and downsides you should know in advance to avoid any surprises in the long run.
This article explains what contingent means in real estate contracts, the different types, and how it can work to your advantage.
What Does Contingent Clause Mean in Real Estate?
In real estate, the property is under contract when a seller accepts an offer from the buyer. However, a contingent clause is dependent on specific criteria or contingencies before proceeding with the final sale.
In other words, the contingent is an agreement that says you are buying the house, but if something happens within a specific time frame, then it does not go through.
This type of offer is common in a competitive market, such as the Sacramento real estate market, where buyers need to beat out other potential buyers for a prime property.
Admittedly, a contingent deal creates room for multiple bids at once, resulting in bigger sales prices and increasing competition between bidders wanting the same property!
Types of Contingent Clauses in the Housing Market
It is becoming more and more typical for buyers to ask for contingent clauses when looking to close on their preferred home. The reasons may include:
- Concerns about financing
- Other buyers with better terms, including cash buyers
- Other factors during the inspection period
Here are the most popular types of contingencies and their explanation.
Financing Contingency
A financing contingency is a clause that allows buyers to back out of an agreement if they cannot secure the necessary financing for purchasing a home. Many contracts include such a provision, and most lenders require them as well.
For buyers who are not 100% sure they will qualify for a mortgage or whose credit may be tight, this can offer some protection against getting stuck with two homes and no way to pay for either.
A critical consideration regarding financing contingencies: many lenders typically require their removal by a specific time – usually somewhere around 30 days – or else they automatically become null and void.
This requirement gives sellers assurance that after 30 days, there will still be someone committed to buying the house before their next home purchase closes. However, a buyer may choose to remove it at any time during negotiations before their offer expires.
This clause should not be an issue for buyers who are pre-approved for a loan since they already have the necessary financing to purchase the house. The same can be said for cash buyers who aren’t relying on any financial lending institutions.
However, suppose buyers are applying for an FHA loan after making an offer with a financing contingency. In that case, they should review the FHA guidelines to ensure their lender’s requirements meet FHA’s approval.
Finally, not all lenders get approval under the same programs or guidelines, so both parties must understand these contingencies ahead of time.
Inspection Contingency
An inspection contingency is a clause that allows buyers to pull out of a contract if they determine the house needs too many repairs before they can move in.
This is often coupled with a required home inspection or warranty, where unidentified repairs after closing would be the seller’s responsibility. In most contracts, sellers get the opportunity to repair or replace whatever’s necessary to pass inspections and close on a home.
If not done within a reasonable amount of time, generally around two weeks, then the buyer has the option to back out and cancel the pending sale without any obligation or penalties.
Home Sale Contingency
When you sign a purchase contract, you must be aware of the home sale contingency clause. This clause lets buyers out of a property acquisition if they cannot sell their own home first.
This has become a common practice among buyers as it gives them time to finish selling their current residence before closing on another house. For this clause to have any power, though, there must be specific timelines that both parties agree upon before signing the contract.
Appraisal Contingency
One of the most critical clauses in a real estate contract is the appraisal contingency. This clause states that if an appraisal comes back with a value lower than the agreed-on sales price of the property, the seller has a few days to either accept the reduced price or the buyer can walk away from the deal.
Contingent With or without Kick-Out
The “kick-out” clause allows the seller to keep accepting bids from other buyers.
For example, suppose another potential buyer submits an offer that meets or exceeds your selling price and terms (or at least comes close). In that case, you could allow the first buyer the opportunity to match or make a better offer rather than proceed to close with the second buyer.
This clause typically comes into play when multiple offers are on the table, so it’s probably not something you need to worry about if you’re the only one making an offer on a property.
On the other hand, a contingent without kick-out deprives the seller of accepting subsequent bids until the buyer meets the required obligations. Thus, this clause could be beneficial in the Sacramento real estate market, where more people are looking to buy than homes available.
Contingent Clauses vs. Pending Transactions
A pending transaction is one where both parties involved agree to sign and acknowledge the terms of the contract. However, finalizing contingent transactions relies on certain conditions or events before both parties involved can sign the final paperwork.
These terms represent important distinctions for real estate brokers because they are subject to management’s approval when there is a contingency clause in the contract. However, permission is not necessary with pending contracts because all parties have already agreed to the terms, and there are no further steps before completing the deal.
Final Thoughts
Contingencies happen regularly in the real estate market, especially now with the current trends. Some people see them as a hassle, while others love the thrill of finding their dream home and entering a bidding war.
Contact us today to better understand how a contingent clause can benefit you when buying your next home. If you are looking to sell your home, we can help you price your home appropriately for selling and find suitable buyers!
