What Is a Contingent Sale and How Does It Work?

A contingent sale is a transaction where the finalization of the deal depends on specific conditions, known as contingencies, outlined within the purchase agreement. They are particularly prevalent in real estate dealings, providing a framework for both buyers and sellers.

Understanding Contingent Sales

A contingent sale includes specific conditions that must be satisfied before the sale can be completed. If these conditions are not met within the agreed-upon timeframe, the contract can typically be terminated without financial penalty, and any earnest money deposit is usually refunded.

Contingencies provide a safety net, allowing parties to back out of a deal if unforeseen issues arise. They ensure significant financial commitments are not finalized until protective measures are addressed, which is especially relevant in high-value transactions.

Common Contingency Types

One of the most frequently encountered conditions is the financing contingency. This clause makes the sale dependent on the buyer securing the necessary loan approval to purchase the property. Buyers typically have a period, often ranging from 30 to 60 days, to obtain this financing, and if they cannot, they can withdraw from the agreement without losing their earnest money.

Another common condition is the inspection contingency, which allows the buyer to have the property professionally inspected for any defects or issues. This typically provides a timeframe of about 7 to 10 days for the inspection to occur and for the buyer to review the report. If significant problems are discovered, the buyer can often negotiate for repairs, request a price reduction, or, if necessary, terminate the contract.

The appraisal contingency protects the buyer and their lender by ensuring the property’s appraised value meets or exceeds the agreed-upon purchase price. Lenders generally will not provide a loan for more than the appraised value of a property. If the appraisal comes in lower, this contingency allows the buyer to renegotiate the sale price or exit the contract without penalty, thereby protecting their financial investment.

A sale of prior property contingency is included when a buyer needs to sell their current home before they can complete the purchase of a new one. This clause allows the buyer a specified period, which can range from 30 to 90 days, to sell their existing residence. If the current home does not sell within this timeframe, the buyer can typically terminate the new purchase agreement.

A due diligence contingency provides a general period for the buyer to conduct a thorough investigation of the asset or property. This clause allows the buyer to terminate or renegotiate the terms of the agreement if the findings during this investigatory period are unsatisfactory. It covers a broad scope of inquiries beyond just physical inspections, ensuring the buyer is fully informed before committing to the purchase.

How Contingencies Operate

Once a purchase agreement containing contingencies is accepted, a specific timeframe, known as the contingency period, begins. This period allows the buyer to fulfill the conditions outlined in the contract. The length of this period varies depending on the type of contingency and the specifics of the agreement, often ranging from 10 to 60 days overall for all contingencies to be addressed.

If all conditions are successfully met within this timeframe, the contingencies are removed, and the sale proceeds toward closing. Conversely, if a condition is not met, the party protected by that contingency typically has the right to terminate the contract. In such cases, the buyer’s earnest money deposit is usually returned.

Buyers also have the option to waive a contingency, meaning they choose to proceed with the sale even if a condition is not fully satisfied. Waiving a contingency removes the protection it offers, and if the underlying issue later causes problems, the buyer may be responsible for the consequences. It is common for sellers to issue a “notice to perform” if a contingency deadline is approaching, prompting the buyer to either satisfy the condition or waive it.