How does a contingent offer work?
Picture this: You’re on the market for a brand-new home and after what feels like months of searching, you find exactly what you’re looking for. The right number of bedrooms, bathrooms and just the right amount of character. There’s only one problem — you’re not sure if your loan application will go through.
You don’t want to lose the house, but you also don’t want to make an offer you can’t afford. So, what do you do? You make a contingent offer. Why? A contingent offer can help protect you when you make an offer on a house. But how does a contingent offer work?
What is a contingent offer?
A contingent offer on a house is an offer with a protective clause on behalf of the buyer. The contingency communicates that if the clause isn’t met, the buyer has the right to back out of the purchase.
This practice protects the buyer from:
- Losing earnest money1
- Getting involved in a deal they can’t afford
- Delegated issues that may arise along the way
The seller has the option to accept, reject or counter the contingent offer. The goal is to reach an agreement that is beneficial for both the buyer and the seller.
The buyer chooses what contingencies, or specific terms, they want to include in the offer and may use the help of a real estate professional. A real estate professional, whether a lawyer or realtor, can help you design and execute the overall offer with the contingencies in place. Using an experienced real estate professional is helpful because they’ll likely have more knowledge of the housing market — unless of course — you’re both a buyer and a real estate professional.
You can have zero, one or multiple contingencies in your offer. Whether the seller accepts them is a different story.
Let’s dive into some common types of contingent offers.
Types of contingencies in real estate
Inspection contingency
A home inspection is when a licensed professional takes a critical look at the inside and outside of a home. The inspection will uncover what kind of issues the buyer will deal with if they go through with the purchase.
Because of this, the inspection is usually funded by the buyer. If they discover something that is ultimately a deal breaker for the buyer, then the buyer can choose to walk away. The inspection should happen soon after the contingent offer is made so the buyer can make a quick decision about moving forward with the purchase or allowing the seller to put the home back on the market.
Appraisal contingency
A home’s listed value may be different than its appraised value. An appraised value is the true value of a home based on its location, square footage, functionality and more. A professional home appraiser will come in and assess a home’s true value before closing. If they arrive at a number significantly lower than what the seller has listed the home for, the buyer can walk or negotiate the price down using the power of the appraisal contingency.
Financing or mortgage contingency
If you’re buying a home with a mortgage, you’ll want to get prequalified for a loan. Getting prequalified means a lender has assessed your candidacy for a mortgage and deems you qualified to receive a certain loan. If your documented financial information changes in the time between prequalification and approval, your loan may fall through and affect your financial ability to make the purchase.
You must inform the seller of this change within a certain amount of time to walk away from the purchase with the earnest money back in your pocket. If you fail to inform the seller of your inability to finance the purchase, then you may still be liable to buy even without proper financing.
Title contingency
A title contingency protects the buyer from a fraudulent seller or a seller who failed to clear up any liens2 on the home. The contingency will require that any liens or title issues are cleared before you make the purchase.
Home sale contingency
A home sale contingency is the highest risk and least common contingency on this list. It states that a buyer isn’t required to purchase from the seller if the buyer fails to sell their current home. A seller isn’t likely to accept this contingency because their home sale depends on the sale of someone else’s home.
What happens when the seller accepts a contingent offer?
Once the seller accepts the contingency offer from the buyer, they can take their house off the market and hope the rest of the purchase goes swimmingly. If they accept the contingent offer but still want to keep their options open, they can do what is called a kick out clause and keep their home on the market for other potential buyers.
If they get another offer, they must give the contingent buyer a certain window to make the purchase. If the buyer makes it in time, the home is theirs. If they don’t, the seller can “kick the buyer out” and go in a different direction.
What are the downsides to making a contingent offer?
- If any of the contingencies aren’t met, the seller can back out — leaving the buyer without a new home to purchase.
- The seller may have to wait longer to finally sell their home because the potential buyer is still trying to sell their current property.
- Contingent offers may carry a higher price tag since the buyer is asking the seller to hold off on selling the home to another buyer.
If you’re a buyer who wants to make an offer on a home, a contingent offer may help get your foot in the door and secure your home purchase. It can also protect you from making an offer on a home you can’t afford, prevent a fraudulent sale or even prevent you from buying a home with a poor inspection. Now that you know how a contingent offer works, you’re ready to take on the rest of your homebuying journey.
Terms explained
1Earnest money: money the buyer gives to the seller to prove their interest in moving forward with the home purchase, also known as a good faith deposit.
2Lien: a right to keep possession of property belonging to another person until a debt owed by that person is discharged.
