What Does Contingent Mean in Real Estate?
Understand what "contingent" signifies in real estate transactions, how conditional sales work, and their path to closing.
One such term during property transactions is “contingent.” This status indicates that a property has an accepted offer, but the sale is not yet finalized. It signifies that certain conditions must be met or waived before the deal can proceed.
Defining Contingent in Real Estate
A contingent status signifies that a buyer has made an offer on a property, and the seller has accepted it. The sale’s completion depends on specific conditions outlined within the purchase agreement. This means the property is under contract, but the transaction remains conditional. Contingencies provide a safety net, allowing either party to withdraw without penalty if specified conditions are not satisfied.
Key Real Estate Contingencies
Numerous contingencies can be included in a real estate contract, each serving as a protective clause for the buyer or seller. A common condition is the home inspection contingency, which grants the buyer a period, often 5 to 10 days, to have the property professionally inspected. During this time, buyers can uncover potential issues and then negotiate repairs or a price reduction, or even withdraw their offer.
Another safeguard is the financing contingency, sometimes called a mortgage or loan contingency. This clause allows the buyer a specified period, usually 30 to 60 days, to secure the necessary mortgage approval. If the buyer is unable to obtain the loan within this timeframe, they can terminate the contract and receive their earnest money deposit back. The appraisal contingency ensures the property’s appraised value meets or exceeds the agreed-upon purchase price. Lenders only finance up to the appraised value, so if the appraisal is low, this contingency allows for renegotiation or contract termination.
A “sale of prior home” contingency protects a buyer who needs to sell their current residence to finance the new purchase. This condition specifies that the new home purchase depends on the successful sale of the buyer’s existing property by a certain date. Should the buyer’s current home not sell within the agreed-upon period, they can exit the contract without penalty.
What Contingent Status Means for Transactions
When a property is listed as contingent, it signals an accepted offer, but the sale is not yet guaranteed. For the seller, this means the property is off the primary market, though not yet officially sold. Sellers generally cannot accept new offers outright, but they may still entertain backup offers. A backup offer can become the primary contract if the initial contingent deal falls through.
For the buyer under a contingent contract, this status means they are actively working to satisfy the conditions outlined in the agreement. This often involves financial commitments, such as arranging for inspections, securing loan approval, and obtaining an appraisal. They have typically provided an earnest money deposit, often 1% to 3% of the purchase price, held in escrow as a demonstration of serious intent. This deposit can be at risk if the buyer fails to meet their contractual obligations without a valid reason tied to a contingency.
Other potential buyers observing a contingent listing know the property is spoken for, but it could return to the active market. This uncertainty can lead interested parties to inquire about specific contingencies or to prepare a backup offer.
From Contingent to Closed
The transition from a contingent status to a closed sale involves steps where the buyer works to fulfill the agreed-upon conditions. Once an inspection is completed, the buyer might present a request for repairs or a credit from the seller based on the findings. Negotiations ensue, and once an agreement is reached, that specific contingency is satisfied. The buyer’s lender will order an appraisal to ensure the home’s value supports the loan amount, a process that can take approximately 10 to 14 days.
As each contingency is met, the buyer formally removes or waives it, often through a written addendum to the contract. The financing contingency typically requires the buyer to obtain a loan commitment letter from their lender within the agreed 30-60 day period. Once all contingencies are removed, the contract becomes firm, and the transaction moves closer to the final closing. The earnest money deposit, typically held by a neutral third party, will then be applied towards the buyer’s down payment or closing costs at settlement.