In real estate, a contingency is a condition set in the contract that has to be met in order for the sale to close. If these conditions are not met, the buyer has the ability to terminate the contract without incurring penalties.
Most contingencies are designed to protect a buyer’s interests against unforeseen issues that may come up during the sale. A contingent listing is one that has an accepted offer contract that includes one (or more) of those contingencies.
Most Common Contingencies
There are a number of different contingencies that a buyer could request, but there are five common ones that are regularly utilized.
Many mortgage lenders will require an appraisal be conducted for all transactions they finance to ensure that the home’s value is equal to, or greater than, the amount they are lending. If the property appraises for less than the offer amount, the buyer will have to either make up the difference in cash or secure additional financing to cover it.
An appraisal contingency is utilized to ensure that, if the home does not appraise for the offer amount and the buyer is not able to secure the additional funds, they can walk away from the contract without penalties.
Home Inspection Contingency
Many buyers request a home inspection contingency, which allows them more options once the inspection has been completed. After the inspection report has been presented, if buyers are unable to satisfactorily negotiate their desired repairs, or if the inspection uncovers a larger underlying issue the buyer is not willing to deal with, they have the option to simply terminate the contract.
Home Sale Contingency
It’s not uncommon for buyers to need funds from the sale of their existing home in order to move forward with the purchase of their new one. If this is the case, buyers have the option to include a home sale contingency in their offer.
This states that the final execution of the contract is contingent upon the buyer selling their property, and will not be able to be finalized until that is accomplished. This contingency is usually defined by a timeline of 30, 60, or 90 days.
Mortgage or Financing Contingency
Similar to the appraisal contingency, a mortgage or financing contingency is designed to protect the buyer’s interests in the case that there are difficulties securing financing.
If they are denied the loan or have issues meeting the mortgage company’s requirements for the loan, this contingency will either allow them time to seek out other financing options or to walk away from the deal altogether.
A real estate title grants its owner the rights of possession, control, exclusion, enjoyment, and disposition over that property. During the contract process, unforeseen issues with the transfer of title can sometimes be uncovered.
These can include contested ownership, property liens, lawsuits, and other legal or financial situations. A title contingency allows buyers the freedom to walk away from the contract if the title report uncovers any such issues.
Should I Accept an Offer With a Home Sale Contingency?
As a buyer, your decision on whether to accept a contingent offer should be determined by a number of factors, including the overall strength of the offer, the potential hindrance the contingency could cause, your own financial needs and timeline, and the current market conditions.
If you find yourself selling in a strong seller’s market, you will have more options to push back on contingencies or negotiate your own protections into the final contract. On the other hand, if you are selling in a buyer’s market, you may need to be more open-minded to entertaining those contingencies.
While fairly common, contingencies do have the potential to seriously slow down the contract to close timeline. It’s important to discuss all potential contingencies with your REALTOR® to determine whether they work for your own needs.
Are Contingent Offers Negotiable?
Every aspect of a real estate contract is negotiable. When you are presented with an offer, you will have the opportunity to negotiate with the buyer on the terms of that contingency or even to add in a Right of First Refusal to protect yourself from endless delays and allow you to seek other buyers.
This will allow you to continue to market the property in order to receive backup offers from other buyers. If an offer comes in without contingencies, the seller will notify their current buyer, who has a specific number of days, as defined by their agreed contract, to either drop their contingency and proceed with the sale or walk away.
If you plan on including a right of first refusal, it is recommended that you negotiate a short number of days for the buyers to make their decision. Three days, as opposed to ten days, will give the buyer enough time to make an informed decision and prevent them from dragging their feet in the hopes of improved circumstances or cold feet on the part of the second offerer.
It may seem like a get-out-of-jail-free card, but a right of first refusal will have pros and cons for your specific situation. Some states also allow for a kick-out clause, which is similar but requires the first buyer to match a higher offer instead of just removing the contingency.
Again, it’s important to discuss any offer you receive in detail with your REALTOR® in order to weigh your options and determine how you would like to proceed.
What Happens to My Listing Status if I Accept an Offer With Contingencies?
Once you accept any offer, your listing status in the MLS will need to be updated to reflect that. MLS boards have specific listing status language to indicate that there is an accepted offer on the listing, but it has not been finalized due to contingencies that have not been met.
This will signal to other buyers that submitting an offer could well be worth their while. Your ability to accept those offers, and the timeline of that process, will depend on the agreed terms of your contract.
The specific language used will vary from state to state, but primarily includes the terms right of first refusal or contingent and pending, along with other caveats, such as continue to show or no show.
If your status is updated to “right of first refusal” or “contingent”, the property will still be displayed as active as well and the days on market will continue to accrue until it is moved to “pending” status. The MLS board your REALTOR® belongs to will have rules regarding when a listing status can be defined as “pending.”
Active: Right of First Refusal vs. Pending
The differences between listing status updates can be confusing to those unfamiliar with the intricacies of real estate jargon. Complicating matters is the fact that different states use different terms to describe the same thing.
In Texas, the term used to define a contingent status is “Active: Right of First Refusal” or Active: RFR. In other states, you may also see “Active: Contingent”. This means that there is a contract on the property, but there are contingencies in place that must still be met. RFR most commonly refers to home sale contingencies but can be utilized for others as well.
If you, as the buyer, would like to put in an offer on an Active: RFR listing, you are free to do so. But, you should go into it knowing that the original buyer has the right of first refusal on that offer.
This means that, if the seller notifies them that there is another offer they would like to accept, they have to decide whether they will remove the contingency that is holding up the sale or back out of the contract and allow the seller to accept the other offer. In right of first refusal, the original buyer does not have to match a higher offer.
Pending and Pending: SB
Pending status indicates that the home sale has moved past the option period into the final stages of the contract and is just waiting for closing. A home in pending status is considered off-market. Pending: Showing for Backups or Pending: SB indicates that, while the home is under contract, the seller has concerns that the deal may not be seen through to fruition and is accepting backup offers just in case.
It’s important to note that backup offers can be submitted on any property, so long as the seller is willing to receive them. Unlike an RFR backup offer, however, there is no set timeline on how long you would have to wait to know if your backup offer is accepted because the first offer will have to fall through in order to move forward.
Can You Make An Offer On A House That Is Contingent?
In truth, it’s possible to submit an offer on any listing that isn’t “sold”, no matter where it is in the listing to sale process. Offers submitted at timely stages will certainly prove more fruitful in the long run, however.
If you have a property that you think would be perfect for you, but it’s listed as Active: RFR or Pending, time is of the essence. Navigating this complex timeline can be tricky, but a licensed Realtor® has the experience and expertise to help you present your best offer on any property.
They can also do research into what specific contingencies are in play and can walk you through the pros and cons of submitting that backup offer to determine if it will really be worth your time and effort.
Tips For Submitting An Offer On A Contingent Listing
While your best bet at successfully buying a home is to submit an offer on a property that does not already have a contract, that doesn’t mean you can’t still pursue the purchase of your dream home if it is Active: RFR or Pending. If you plan on submitting a backup offer, here are a few tips to help you succeed.
1. Work With a REALTOR®
Your best bet in any real estate transaction is to have a licensed REALTOR® in your corner to walk you through all the intricacies of the process. They will be able to bring years of experience and education to bear.
From detailed insights into the property itself and the surrounding community to negotiations to closing, a REALTOR® is duty-bound to protect you as their client and promote your best interests.
Pro tip: Be sure you have a signed Buyer’s Representation Agreement with your REALTOR® before entering into any contract negotiations so you are legally considered their client and not just a customer.
2. Add a Personal Touch
If you are submitting a backup offer on a contingent listing, or even one that is just showing for backups, don’t forget that you may not be the only backup offer they receive. It’s important to help your offer stand out from the crowd.
Sometimes a personalized letter, expressing your love for the property and your dreams for the future there will help a seller consider your offer more strongly. Selling a home is, by nature, an emotional process, so by appealing to that emotion you might be able to give your offer a better chance at being considered.
3. Be Patient and Attentive
While submitting a backup offer is a waiting game, it’s important to remain attentive to any communications the seller sends you. Prompt responses will speak to your level of commitment and let the seller know you will not be difficult to work with, making your offer that much more attractive.
It’s also important to remember to be patient. If you seem pushy or aggressive, it can sour their opinion of you and ruin your chances at moving forward.
Contingencies undoubtedly complicate the home sale process, for both buyers and sellers. Delays and uncertainties are not what anyone wants when buying or selling a home, but contingencies are common in real estate and nothing to be scared of. Your REALTOR® will help you navigate the obstacles successfully, no matter which side of the transaction you are on.
If you are ready to sell your home, buy a home, or just have questions about the process, we would love to help you. Visit us at homecity.com to get started.