Sure, we all know what the word “contingent” means, but what about in the context of real estate? You’ll come across a variety of terms associated with listings during your home search, including “pending,” “under contract” or “contingent.” On our site, you’ll see “ACTIVE – BACKUP” which means it’s an active listing with a contingency contract that is still showing and taking backup offers. In other words, the buyer and seller are engaged — but not married yet!
Let’s delve into the details of what a contingency is in the real estate world, including the various types of contingencies you might encounter.
On a real estate listing, when a home is marked as “contingent,” this means the seller has accepted an offer from a buyer, as long as certain conditions are met. In other words, the success of the sale is contingent upon agreed-upon criteria, including the home inspection producing certain results, the buyer being able to sell their current home, or the buyer receiving confirmation of financing.
In general, contingencies are favorable for the buyer, as it protects them from being liable if unforeseen issues were to arise. Plus, a contingency allows the buyer to ensure and prove they have all their ducks in a row from a financial perspective. However, in a competitive market, contingencies can sometimes be a disservice to a buyer, as the seller has the luxury of skipping over an offer with strings attached, with so many other enticing offers to choose from.
Let’s explore the different types of contingencies in real estate and some of the pros and cons associated with each!
In order for a buyer to avoid being stuck owning two properties, they may have to include a home sale contingency, which simply means their current home must sell in order for them to be able to purchase the new home. This allows them to have a large enough amount of cash on hand from the sale to cover the down payment, closing costs, etc. If they did not include a home sale contingency, the buyer would be misrepresenting their financial situation. But one way to avoid this contingency (especially in a competitive market) is with a bridge loan, which is a short-term loan serving as a source of funding until longer-term financing is secured.
Also known as a “financing contingency,” a mortgage contingency gives buyers the flexibility to cancel the contract with no penalties if they are unable to secure financing from a lender. This contingency extends from the binding agreement date up until closing day, and if the buyer does not secure financing, they are free to terminate the contract and even get their earnest money back.
In order to avoid this type of contingency as a buyer, it’s wise to get pre-approved. This process involves an extensive look at your financial status to see just how much house you can afford — and most importantly, how much your lender will allow you to borrow. This allows you to be taken a little more seriously as a buyer and will cause sellers to consider you over someone who hasn’t already been pre-approved for a loan.
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One of the most common contingencies is a home inspection contingency. This means the sale of the property is contingent on a home inspection that doesn’t reveal any major issues with the home. This might include roofing problems, foundation issues, plumbing issues, electrical problems, and any other major discoveries. These types of findings may be grounds for a renegotiation of the sales price or result in an agreement regarding who will be responsible for the completion of repairs. And in some instances, the buyer may have the opportunity to back out of the sale completely. However, just because issues are found, this doesn’t mean the deal will always fall through. There is always the possibility for the buyer and seller to come to an agreement on a reasonable path forward that satisfies both parties. Having this contingency in place simply gives you the flexibility and legal protection to have those conversations if needed.
An appraisal contingency is exactly what you might have guessed — it means the sale is contingent upon the appraisal coming back with a value comparable to the contract price. This protects the buyer from overpaying for a home, but more importantly, it protects the lender from giving a loan for an amount way more than what the property is actually worth. Over the last several years, it became more common to see appraisals coming back much lower than the contract price. And one way to work around this is by having a chunk of cash on hand to make up the difference.
Lastly, a title contingency means the sale is contingent upon the title being “clean,” which is to say there are no third-party claims, such as mortgage liens or unpaid debts. Before closing day, a title company will conduct a title search of public records to make sure the seller has the right to sell the property and no one else can claim it once the sale is complete. A title contingency gives the buyer the opportunity to back out of the contract if the title search reveals an unclean title. A buyer can further protect themselves by purchasing title insurance, which protects them from any future losses or damages as a result of a bad title.
The Group has been the top-producing real estate company in Northern Colorado since 1976. Our team is more than qualified to assist you with any questions related to buying and selling in Northern Colorado, from your initial home search to closing day. Contact us to get connected with one of our agents or other real estate professionals!
Posted InReal Estate | UnderBuying, Homes for Sale, Real Estate, Selling
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