Can a Contingent House Fall Through?
Learn why conditional real estate transactions sometimes don't reach closing and what occurs when they don't.
A “contingent house” refers to a property where an accepted offer depends on specific conditions being met before the sale finalizes. These conditions, known as contingencies, are outlined in the purchase agreement. If not satisfied within an agreed-upon timeframe, the contract may be terminated. Understanding contingencies is essential for both buyers and sellers, as they dictate if a real estate deal proceeds to closing.
Common Real Estate Contingencies
A contingency clause in a real estate purchase agreement specifies an action or requirement that must be met for the contract to become legally binding. These clauses protect both parties, allowing them to withdraw from the contract without penalty if certain terms are not satisfied.
One common type is the financing contingency, which makes the sale dependent on the buyer securing the necessary mortgage loan. An appraisal contingency stipulates that the home must appraise for at least the agreed-upon purchase price. This protects the buyer from paying more than the property’s market value and assures the lender the collateral supports the loan amount.
The inspection contingency grants the buyer the right to have the home professionally inspected for significant issues. Based on findings, the buyer can request repairs, credits, or terminate the contract. Another condition is the sale of current home contingency, meaning the buyer’s purchase relies on selling their existing home within a specified period. Finally, a title contingency ensures the property has a clear title, free from liens, disputes, or other claims affecting ownership. This involves a thorough search of public records to verify the seller’s legal right to transfer the property.
How Contingencies Can Lead to a Failed Transaction
A financing contingency can cause a deal to collapse if the buyer’s loan application is denied, they cannot meet lender requirements, or fail to secure the agreed-upon interest rate. Even with pre-approval, factors like job loss or a sudden dip in credit score can derail final loan approval, preventing the buyer from securing necessary funds.
When an appraisal contingency is in place, a low appraisal, where the property is valued below the purchase price, can jeopardize the sale. If the appraised value is lower than the agreed-upon price, the lender will not finance the difference. This requires the buyer to cover the gap with additional cash, or renegotiation between buyer and seller may occur. If the parties cannot agree on how to bridge this gap, the contract can be terminated.
For the inspection contingency, significant issues uncovered during a home inspection, such as major structural defects, severe pest infestations, or hazardous materials like asbestos, can lead to a failed transaction. If the buyer and seller cannot reach an agreement on repairs, credits, or a price adjustment based on these findings, the buyer can terminate the contract.
A sale of current home contingency introduces uncertainty, as the buyer’s inability to sell their existing property within the designated timeframe can cause the contingent offer to fail. Sellers often view this contingency with caution because it ties up their property while waiting for another sale to materialize, potentially leading to delays or the need to re-list.
Lastly, unresolved title defects discovered during a title search, such as unreleased liens, boundary disputes, or errors in public records, can prevent the sale from closing. If these issues cannot be cleared by the seller before the closing date, the buyer has the right to terminate the purchase agreement.
Outcomes When a Contingency Is Not Met
When a contingent offer falls through due to an unmet condition, the purchase agreement becomes null and void. Both the buyer and seller are released from their contractual obligations, assuming the termination aligns with the contingency terms. The property then becomes available for the seller to re-list or consider other offers.
A significant aspect of a failed contingent transaction is the fate of the earnest money deposit. If the contract is terminated because a valid contingency was not met, the buyer receives their earnest money back. Contingencies are designed as protective measures, allowing buyers to withdraw without penalty under specified circumstances, such as a denied loan or an unsatisfactory inspection. However, if a buyer backs out for reasons not covered by a contingency, or fails to meet deadlines without a valid contractual reason, they risk forfeiting their earnest money to the seller. Earnest money deposits typically range from 1% to 3% of the home’s value, though in competitive markets, they can sometimes be higher.