A contingent offer is an offer from a buyer to a seller with conditions that must be met for the offer to be binding. The contingency is the clause that gives the buyer the right to back out and recuperate any money they’ve put down if the clause isn’t met.
The seller can accept, reject or counter the contingent offer. The goal is to reach an agreement that is beneficial for both the buyer and the seller. So, what implications do contingent offers have on the success rate of home sales? Read on to learn more about how often contingent offers fall through.
How long does a house stay in contingent status?
The length of contingency is on a case-by-case basis and will depend on what type of contingencies are in the offer. The contingent period usually lasts anywhere from 30 to 60 days. If you have a mortgage contingency, the buyer’s due date is usually about a week before closing. Overall, a home stays in contingent status for the specified period or until the contingencies are met and the buyer closes on their new house.
Why do buyers back out of buying a home?
Buyers back out of buying a home for a variety of reasons. There are, however, some common reasons why buyers back out of a deal, including:
- The home appraisal returns a lower value than the asking price. If the seller isn’t willing to negotiate down, then most people won’t move forward with the sale — unless they’re desperate to find a new home.
- The inspection returns unattractive results, and the buyer isn’t looking for a fixer-upper. A home inspection may come back with fundamental issues that may cost the new buyer a pretty penny like replacing a roof or cesspool.
- The buyer didn’t secure financing. If the buyer failed to prequalify for a loan or their financial disposition changed, they may not receive loan approval and won’t be able to finance the home. As a buyer, make sure to communicate this as soon as possible. A mortgage contingency clause can only protect you if you act fast. The time to communicate may vary depending on your offer. If you do not communicate your lack of financing in time, you may still be liable for the home purchase.
- Title issues. Before closing, the buyer should request a title inspection. If there are any liens or claims to the house that are not cleared up at the buyer's convenience, they may walk.
- The buyer can’t sell their own home. If the buyer fails to sell their own home and their new purchase depends on a sale, they may back out from buying a home. A home sale contingency is the highest risk and least common contingency clause. It is unlikely a seller will agree to this offer but if they do, their deal will depend on the buyer's terms.
Can a seller back out of a contingent offer?
Technically, yes — a seller can back out of a contingent offer. Before agreeing, they can choose to reject or counter the original offer with their own terms. Once the offer is accepted, if the contingencies aren’t met, the seller can back out but there may be legal or financial implications involved. This might occur if the homes appraised value comes back much lower than the sellers asking price and the seller refuses to lower.
The seller can also enact what is called a kick-out clause. A kick-out clause is a contingency that protects the seller. In simple terms, it allows the seller to keep their house on the market after accepting a contingent offer. If the seller gets another offer, they must give the original buyer a specified window of time to close. If the buyer does not close in time, the seller can “kick them out” and accept the other offer.
The bottom line
Overall, successful contingent offers are common. According to the National Association of Realtors (NAR), 76 percent of all homes sold in January 2018 had contingencies. Among contingent offers, less than five percent fall through, according to multiple sources.
Broken offers may arise because the buyer isn’t able to secure financing or because the seller isn’t willing to lower their listing price after a low appraisal. In the end, coming to a fair agreement for both the buyer and the seller is the best way to ensure a successful home purchase.