Do Contingent Home Sales Fall Through?

A contingent home sale means an accepted offer depends on specific conditions being met before the transaction finalizes. These conditions, known as contingencies, are part of the purchase agreement and must be satisfied within a set timeframe. They protect both parties by addressing potential risks before the sale becomes binding.

Defining Contingent Offers

A contingent offer in real estate is a conditional agreement, meaning the purchase is subject to certain criteria being fulfilled. These conditions are designed to protect the buyer, allowing withdrawal from the contract without penalty if the specified terms are not met. Various types of contingencies commonly appear in real estate contracts.

Financing Contingency

A financing contingency, also known as a mortgage contingency, makes the sale conditional upon the buyer securing a mortgage loan. This allows buyers to back out if they cannot obtain financing within a set period, typically 30 to 60 days.

Appraisal Contingency

An appraisal contingency requires the home to appraise for at least the agreed-upon sales price. If the appraisal is lower, this contingency allows the buyer to renegotiate the price or terminate the contract.

Inspection Contingency

An inspection contingency grants the buyer the right to conduct a professional home inspection within a specified period, typically 7 to 10 days after the offer is accepted. The buyer can request repairs, credits, or cancel the contract if significant issues are discovered.

Sale of Current Home Contingency

A sale of current home contingency means the buyer’s ability to purchase the new property depends on the successful sale of their existing home. This provides a safeguard for buyers who need to sell their current residence to finance the new purchase.

Primary Causes of Contingency Failure

Contingencies are included in real estate contracts to protect both buyers and sellers, but they can also be the reason a deal does not reach closing. A financing contingency often fails if the buyer’s loan application is denied. This denial can stem from changes in the buyer’s credit score, employment, or debt-to-income ratio after initial pre-approval. Lenders may also revoke approval if property appraisal issues arise or if the buyer cannot verify documentation.

An appraisal contingency fails if the property’s appraised value is lower than the agreed-upon purchase price. The lender will only finance up to the appraised value, creating a financial gap. If the buyer and seller cannot agree on a new price, or if the buyer cannot cover the difference, the deal may collapse.

Inspection contingencies often lead to issues when significant defects are found during the home inspection. These include major structural problems, severe plumbing or electrical issues, or malfunctioning HVAC systems. If the seller will not address these concerns through repairs or credits, or if the buyer will not accept the property as-is, the buyer may terminate the contract.

The sale of current home contingency can fail if the buyer’s existing property does not sell within the contract’s timeframe, or if its sale falls through. This prevents the buyer from proceeding with the new purchase, as their financing is tied to the sale of their previous residence.

Implications of a Failed Contingency

When a contingency is not met and a home sale falls through, there are implications for both parties. The earnest money deposit, typically 1% to 5% of the sale price, is a key consideration. If the failure is legitimate, such as a low appraisal or unsecured financing, the earnest money is usually returned to the buyer. If the buyer defaults without a valid reason or misses deadlines, the earnest money may be forfeited to the seller.

For the seller, a failed contingency means the property re-enters the market as an “active” listing. This results in lost marketing time, missed opportunities with other buyers, and restarting the selling process. The property may also gain a negative perception from potential buyers.

Buyers also face consequences, including lost time and out-of-pocket expenses. Buyers pay for inspections and appraisals, which average $200 to $500 for inspections and $300 to $500 for appraisals. These costs are generally non-refundable, even if the deal collapses. After a failed transaction, buyers must resume their home search. A failed contingency does not always lead to termination; sometimes, it initiates a renegotiation of terms, such as a price reduction or seller contributions.

Actions for Buyers and Sellers in Contingent Transactions

Both buyers and sellers should take proactive steps in contingent transactions.

For Buyers

Obtain mortgage pre-approval before making an offer to strengthen your financing position. A pre-approval letter indicates financial ability, making an offer more attractive.
Understand the terms and timelines of all contingencies in your offer. Adhering to these deadlines protects your earnest money.
Act promptly on tasks like scheduling inspections, arranging appraisals, and submitting loan applications within specified timelines.
Maintain financial stability throughout the contingency period. Avoid large purchases, job changes, or new debt, as these can affect loan approval.
Have realistic expectations regarding repair requests or appraisal outcomes. Not all issues will be addressed, nor will every appraisal match the offer price.

For Sellers

Carefully review contingent offers, evaluating each contingency’s implications and strength. Understanding buyer conditions helps assess the likelihood of closing.
Set clear, reasonable timelines for contingencies in the contract. This provides a structured framework for the transaction.
Be prepared to negotiate or address issues from inspections or appraisals. This preparedness facilitates smoother discussions and increases the chances of the deal progressing.
Maintain open communication between yourself, your agent, and the buyer’s agent to address concerns efficiently.
Consider accepting backup offers, especially if your initial accepted offer includes contingencies. This provides a fallback if the primary deal falls through.