Updated June 4, 2021
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If you’re buying or selling, you may need a contingency to CYA.
So you’re shopping for a new home, and you find a listing you like. The only thing is that the listing is marked contingent—but what does that mean? It means that the buyer or seller has some stipulations in place to protect themselves during the sale. And this is a good thing.
A home sale is likely the largest transaction you’ll make in your lifetime. The median home price in the United States is $248,857, according to Zillow. Whether you’re trying to sell or buy, you want to protect yourself during the process.
This is where contingencies come in. This article will cover how contingencies work, and what types of contingencies you can add to your offer or acceptance of an offer. Let’s get started.
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A home with a contingent status means the seller accepted an offer from a buyer, but either party placed a contingency on the sale. Most of the time, the contingency is placed by the buyer to protect them during the inspection process.
When you see a home listed as contingent that means that the sale has been agreed upon, but the transaction is not complete. The sale could fall through, which is common. Even more common: offers with contingencies attached to them.
A contingency is a stipulation put in place to protect a buyer or seller in a real estate transaction. It meanest that specific requirements must be met for the real estate deal to go through. There are some common contingencies and some rare ones that may be useful to you during the transaction process.
There are many types of contingencies. They all mean indicate different levels of likelihood that the deal will go through—or how cautious you should be about putting in an offer if the sale falls through. Here is a list of the types of contingencies you may find:
Additional Inspection Clause
There are several inspections that buyers can arrange in addition (and for an additional fee) to the standard home inspection. Additional inspects cost anywhere from $100 to $400 each. However, any of them can save you thousands in repair costs—and help you lower the price of the home. Additional inspections include:
When you buy a home, you want to be sure that the house is worth the price you’re paying. Buyers can bring in their own appraiser to verify the home price. If the appraised value comes back lower than the offer, the buyer can try to renegotiate or walk away.
If a buyer accepts an offer, but the seller comes up short with their earnest money deposit or has another financial issue, this contingency gives the seller the right to back out of the deal.
Home Inspection Contingency
Every home buyer should pay for a home inspection. This covers all the essential basics like the electric system, roof, and foundation. Issues found during the inspection could mean the buyer requests the seller to fix issues before the sale. It could also mean the buyer renegotiating a price or backing out of the agreement.
This is a very common contingency.
Home Sale Contingency
Many buyers use the proceeds from selling their current home to buy their new home. Some may ask for a home sale contingency, which means the seller would take the house off the market to wait for the buyer to sell their home. This isn’t advantageous for the seller, who may end up waiting months for the buyer. So this contingency is often rejected by the seller.
Like the financial contingency, this protects the seller if the buyer is unable to get approval for a mortgage. This means the seller can walk away instead of waiting for the seller to get their ducks in a row. This is a very common contingency.
Right of First Refusal
|Also known as the kick-out clause, with this contingency, the seller can keep their house on the market until the contingent offer becomes a sale. If another person should make an offer, the original buyer has anywhere from 24 to 72 hours to drop the contingencies in their offer. If they don’t, they forfeit their offer.|
This allows the seller to accept a more lucrative offer. For buyers, it means that you can still make an offer on a home with this contingency—something your listing agent can do for you on your behalf. Just be prepared to make it a better offer.
During the buying process, the seller usually does a title search as few mortgage companies would issue a mortgage without one. If an issue comes up during the titling stage, this contingency allows the buyer to walk away.
In addition to a title contingency, Insurify recommends buying title insurance whenever you buy a house.
In some states, there is no difference between contingent and pending statuses on a house. In other states, contingency is the first step in the home buying process. Once the contingencies are met, the seller can change the status to pending.
There are three main types of pending statuses you may find attached to a real estate listing. These are:
Pending taking backups
Pending a short sale
Pending extended for many months
In the first scenario, pending taking backups, the seller has accepted an offer but is willing to accept a backup offer if another buyer is willing to make one. In this scenario, the buyer will likely have to offer an amount above whatever the other buyer has already negotiated. This is an excellent position for the seller but a problematic position for the buyer.
Pending a short sale means that the seller has accepted an offer that is less than the remaining balance owed on the mortgage. These types of transactions were common, especially after the 2008 housing market crash, where many homeowners found themselves underwater—where the mortgage is more expensive than the value of the home.
A short sale is a way for homeowners struggling to pay their mortgage, either avoid foreclosure or get out of an underwater home. However, the lender has to approve the sale, and this can take several weeks to several months.
The final scenario, pending extended for many months, is typical for newly constructed homes though rare in the general real estate market. It means that an offer has been accepted, but that there has been a long delay, usually based on the construction schedule.
However, sometimes a house is listed “pending extended for many months” simply because the real estate agent never removed the home from the multiple listing service (MLS). If you’re interested in a house with this status, just ask your real estate agent to inquire about the listing.
If you have the choice, you’re probably better off having the home marked as pending. The reason: marking your home as pending pauses the rise of days on the market. This can be advantageous because, should the home be placed back on the market, it will appear to be a fresh listing. The longer the home is on the market, the less bargaining power you have. Besides, while the home sale is pending, or contingent, the realtor is unlikely to show the home. The drawback of using this approach is that the listing will likely be removed from sites like Realtor, Zillow, and Trulia. So if the deal falls through, the listing process begins again.
In short, yes. You can make an offer on any home that is not sold. Just remember that when you make an offer on a contingent or pending listing, you are not in an advantageous position. The seller is. That means you may end up paying more for the property than you would for a similar property. The choice is up to you.
Whether you are a buyer or a seller, knowing the difference between home sale statuses gives you a better vantage to make or accept offers. Real estate is like a game with rules you can use to your advantage. The more you know, the better you’ll be able to position yourself.
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J.J. Starr is a health and finance writer with a background in banking, lending, and financial advising. She holds a Series 6, FINRA, and life insurance licensure and a master's degree from New York University. Through her writing, she strives to use her decade of experience to help consumers make sound financial choices. Connect with J.J. on LinkedIn.Learn More