What Does Contingent Mean When Selling a Home?

When a home is listed as “contingent,” it signifies that a seller has accepted an offer from a buyer, but the finalization of the sale is dependent on certain conditions being met. These conditions, known as contingencies, are outlined in the purchase agreement. If these circumstances are not satisfied within an agreed-upon timeframe, the buyer usually has the option to withdraw from the contract without penalty. This status protects both parties by ensuring that unforeseen issues can be addressed before the transaction is completed.

Understanding a Contingent Offer

A contingent offer means the home sale is not yet final, as it hinges on specific conditions being fulfilled by a deadline. While an offer has been accepted, the property remains in a conditional state, distinct from a “pending” status where all conditions have been met and the sale is moving toward closing. For the seller, a contingent status means the property is off the active market, but with a possibility that the deal might fall through if the contingencies are not satisfied. This situation allows some sellers to continue showing the home or accepting backup offers.

For the buyer, including contingencies in an offer provides protection, allowing the buyer to back out of the deal and reclaim their earnest money deposit if a condition isn’t met. Earnest money, typically 1% to 5% of the sale price, is a deposit made by the buyer to demonstrate serious intent, held in an escrow account. This financial protection is important as it prevents buyers from being financially committed to a purchase that may prove problematic or unaffordable.

Common Types of Contingencies

Several types of contingencies are included in real estate contracts to protect the buyer’s interests. Each addresses a different aspect of the home-buying process, providing an opportunity for due diligence.

Financing Contingency

A financing contingency makes the sale dependent on the buyer securing a mortgage loan. This clause grants the buyer a period to obtain loan approval. If the buyer is unable to secure financing within this timeframe, they can terminate the contract and receive their earnest money deposit back. This protects the buyer from being obligated to purchase a home they cannot afford due to a lack of funding.

Inspection Contingency

An inspection contingency allows the buyer to hire a professional home inspector to examine the property for defects or issues. If the inspection reveals major problems, the buyer can negotiate with the seller for repairs, a price reduction, or credits. Should an agreement not be reached, the buyer can cancel the contract without losing their earnest money.

Appraisal Contingency

An appraisal contingency ensures the home’s appraised value meets or exceeds the purchase price. Lenders require an appraisal to ensure the property serves as collateral for the loan. If the appraisal is lower than the purchase price, the buyer can renegotiate the price with the seller, cover the difference with cash, or withdraw from the contract and retain their earnest money. This protects the buyer from overpaying and the lender from over-lending for a property.

Home Sale Contingency

A home sale contingency means the buyer’s purchase of a new home depends on the sale of their current property. This contingency is useful for buyers who need the proceeds from their existing home sale to finance the new purchase, including down payment and closing costs. It provides a period for the buyer to sell their home, and if it does not sell within that time, the buyer can back out of the contract without penalty. Sellers may include a “kick-out clause” with this contingency, allowing them to continue marketing the property and accept another offer if the first buyer cannot fulfill their home sale contingency quickly.

The Contingency Period and Outcomes

Once a contingent offer is accepted, the contingency period begins, allowing both parties to fulfill the conditions outlined in the contract. The duration of this period varies depending on the type of contingency and local market practices. During this time, the buyer works to satisfy their conditions, such as obtaining mortgage approval, conducting inspections, or awaiting an appraisal report.

If all contingencies are met within the agreed-upon timeframe, the sale moves forward. For instance, if the financing is approved, the inspection is satisfactory or issues are resolved, and the appraisal meets the purchase price, the conditions are removed, and the contract becomes firm. The transaction progresses toward closing, and the buyer’s earnest money converts into part of their down payment or closing costs.

If one or more contingencies are not met, several outcomes are possible. If the buyer cannot secure financing, if the inspection reveals significant flaws, or if the appraisal is too low and renegotiation fails, the buyer has the right to terminate the contract. In such cases, the earnest money deposit is returned to the buyer, provided the termination occurs within the contingency period and according to the contract’s terms. If a buyer backs out for a reason not covered by a contingency or after the contingency period has expired, they may forfeit their earnest money to the seller. Both parties can also renegotiate the terms of the contract if a contingency is not met, adjusting the price or conditions to keep the deal alive.