A lot can go wrong between making an offer and closing on your house. Your mortgage loan could fall through. An inspection might find serious damage. The appraisal could come in low.
Fortunately, if you have certain contingency clauses in your contract, you may be able to back out of the transaction unscathed in such instances. Here's an overview of what it means to make a contingent offer on a house and what real estate contingencies you may want to consider for your home purchase.
What are real estate contingencies?
A contingency is part of a real estate contract that requires a certain condition to be met before it is enforceable. If that condition is not met within the timeframe specified, the contingent party can break the contract and exit the transaction without financial consequences.
For example, a buyer might include a financing contingency in their contract, which says they must be approved for a mortgage loan in order to go through with the deal. If their loan were to fall through, they could back out of the contract and have their earnest money deposit refunded.
Contingency clauses are basically a safety net for buyers. As Michael J. Franco, a broker at Compass, explains: "Contractual contingencies protect the parties from various issues that could arise throughout the transaction."
Some homebuyers waive contingencies — or opt not to include them — to make their offers more attractive. This often occurs in a seller's market, when bidding wars are common.
Common types of real estate contingencies when buying a home
These are four contingency clauses that are commonly used in real estate contracts. Each offers the buyer an option to back out of the deal should a certain condition not be met:
1. Inspection contingency
An inspection contingency allows the buyer to get a professional home inspection of the home. If the inspector finds problems and the seller is unwilling to repair them or renegotiate the price, the buyer can back out of the sale.
The impact of inspection contingencies on home sales is huge. Not only are inspections a key part of the homebuying process, but they can also reveal a lot about a property and the financial investment (or loss) it can present. This is arguably one of the most important contingencies you can include in a contract.
2. Financing contingency
Financing contingencies — also called mortgage contingencies — state that the deal hinges on the buyer's ability to get a mortgage. Financing contingency requirements in real estate offers also include a timeframe. This specifies a deadline by which that financing must be finalized.
"Mortgage contingencies clauses are very common," says Christopher Totaro, sales director and broker at Coldwell Banker Warburg. "Basically, if the buyer is unable to secure a mortgage, the buyer is released from the contract without penalty."
3. Appraisal contingency
Including appraisal contingencies in real estate offers is critical if you plan to use a mortgage loan. That's because mortgage lenders will only loan borrowers up to the appraised value of the home (minus their required down payment). If the home's appraisal comes in lower than your offer, you'd then be responsible for making up the difference out of pocket (or renegotiating the deal). With an appraisal contingency in place, you'd have a third option: backing out of the deal entirely.
4. Sale of current home contingency
Sale contingencies are only for buyers who are also selling their current home. With this contingency in place, the buyer would be able to exit the purchase if they were unable to sell their home by the specified deadline.
Sale contingency planning for homeowners can be challenging — and can often be a big turnoff for sellers, so if you're considering one of these contingencies, talk to your agent first. They can fill you in on the potential challenges you might face as a buyer.
The role of real estate contingencies in protecting homebuyers
Making a contingent offer can protect buyers, giving them a backdoor out of a deal should something go amiss. They're good for:
Providing a safety net for unforeseen issues
It's easy to get distracted by the idea of that dream home, but a lot can go wrong before closing on the property. Having the right contingencies in place can protect you if they do.
Say your home inspector finds a mouse infestation or that the attic has mold. If these are dealbreakers or issues you don't want to deal with, an inspection contingency would let you back out of the deal without losing your earnest money deposit.
Allowing legal withdrawal from the deal
Contingencies also protect you legally. When you buy a house, you and the seller (or your agents) will negotiate terms — including the price and any contingencies — and solidify those in a contract. Once signed, the contract is legally binding.
Either way, if both parties agree in writing to contingencies, those conditions must be met. If it's not, you'll have the option to walk away from the transaction.
"A contingency clause is an element in a purchase and sale agreement that is put in place as a protection to a buyer," says Craig Walker, a strategic real estate advisor at Real Estate Bees and an agent with Keller Williams. "It can render a transaction void — or rather canceled — if a certain requirement or request made by the person making the offer is not satisfied by a specific date."
How real estate contingencies affect home sellers
Contingencies may be a buyer-side protection, but they have a big impact on sellers, too. Here's what you'll want to know about contingencies when listing your house.
Understanding the potential delays and challenges
Contingencies mean more conditions need to be met before you can close the deal. An inspection might need to be done, a loan might need to be approved, or the buyer's previous home may need to sell first. These items can all delay the transaction or even threaten it altogether.
Make sure you talk through the possibility of contingencies with your real estate agent and understand what each one will mean for your deal. You'll want to consider a buyer's contingencies carefully when weighing an offer.
Negotiating real estate contingencies
Contingencies are negotiable, as are all other parts of the sales contract. Use these strategies for negotiating real estate contingencies if you're buying or selling a home.
Tips for both buyers and sellers
Before you can negotiate, you need to understand your local market conditions. Who has the upper hand in the transaction? If there are few homes for sale and lots of buyers, the seller likely does. Buyers will need to minimize contingencies and make a seller-friendly offer if they want to get a home.
If there are tons of homes for sale and not enough buyers, though, then the buyer holds the power. They'll have more leverage and can likely ask for more contingencies than those located in a seller's market.
Work closely with your agent when determining what contingencies to ask for (or to accept, if you're a seller). And if you're not happy with one, ask to revise it. You can shorten the inspection contingency, for example, or propose an earlier deadline for their financing contingency.
Balancing protection with deal attractiveness
While including contingency clauses can protect you when buying a home, they can also make your offer less attractive because of the extra risk they pose to a seller. They can also delay things, particularly sale contingencies that require the sale of another property for the deal to go through.
"An offer may be higher than all the other offers, but if it is contingent upon the sale of the buyer's property, a seller may not want to wait for the sale to happen or take the risk that the buyer's property does not sell," Totaro says.
For these reasons, it's important to talk to an experienced local real estate agent before including contingencies in your offer — or waiving them.
"Any and all contingencies, whether submitted or waived by a buyer, should always be after consulting a licensed real estate professional," Walker says. "All situations are unique to their particular transaction."
Removing or waiving contingencies
Including contingencies is smart, but you don't have to do it. In fact, there are even times when waiving a contingency might be best for your deal.
Risks and considerations
If you waive contingencies, you could end up buying a house with unforeseen issues and repairs. You might also owe more than your lender is willing to loan you (if the appraisal comes in low) or may have to foot the entire home purchase bill yourself (if your loan fails to go through).
You could also lose your earnest money deposit. While you could technically still pull out of the deal if something goes awry before closing, you'd forfeit that deposit. For many buyers, this amounts to thousands of dollars lost.
When and why it might be beneficial
You might want to intentionally waive contingencies if you're in a competitive market. This could help you stand out from other buyers and increase the likelihood that you get the home you're bidding on. It may also make sellers more willing to negotiate on price with you.
If you're buying in all cash, you can also opt to waive the appraisal contingency, as this only applies to those using mortgage financing.
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Real estate contingencies FAQs
What is a contingent offer on a house?
Making a contingent offer on a house means that your offer includes contingencies, or clauses that stipulate that you don't have to go through with the purchase under certain circumstances.
What does it mean if a house is contingent?
If you're browsing for homes and you see a property's status listed as contingent, it means that someone is under contract to buy it, but they're still in the period where contingencies need to be met.
What is a mortgage contingency?
A mortgage contingency or financing contingency allows a buyer to back out and keep their earnest money if they aren't able to get approved for a mortgage.
How long can a house be contingent?
Your contract will specify when you need to close by, but typically homes can be contingent for a month or two while the buyer goes through the process of inspecting the home and securing their mortgage.
