What is Contingent in Real Estate?
What is a Non-Contingent Purchase Offer? No Contingencies Meaning?
When buying or selling a home, many buyers and sellers ask, "What does contingent mean in real estate?" And "what is a contingency?" OR, what does contingent mean on a house? If you’re a complete novice to real estate investing, making sense of all the legalese in a contingent home sale contract can be a little intimidating initially. This is because contingent home sales involve a lot of paperwork. Here are just a few documents that you might use in a real estate transaction: Real Estate Transfer Disclosure Statement (TDS), C.A.R. Contingency Removal (CR), Notice To Buyer to Perform (NBP), and the Contingency For The Sale Or Purchase of Other Property (COP).
Silicon Valley and the Bay Area are strong real estate markets with competitive buyers where sellers are typically offered multiple bids that often come with no contingencies. So there is a real chance of contingent home sale offers being rejected in a seller’s market.
But it doesn’t mean contingent offers are much less common. Buyers would still like some protection on their side in the event a bank loan or financing arrangement falls through or a new faulty condition of the property is discovered at a much later stage of the contract. A National Association of Realtors Confidence Index March 2022 reveals that only 23% and 28% of home shoppers waived inspection and appraisal contingencies. A NAR researcher highlights in a 2021 post that the decline in buyers waiving contingencies is a healthy trend. Contingencies are protective clauses in residential purchase agreements to help buyers back out of the deal without losing their initial earnest money if things don’t go as expected.
Here’s a primer on what contingent means in real estate and what real estate non-contingent offers are. We will also examine some of the most common customary contingencies in real estate.
Disclaimer: This blog article is for general informational and educational purposes only. Not investing advice. We make no representation or warranty, express or implied, as to the accuracy, adequacy, or validity of the information. Questions involving any legal aspect of contingency clauses in home purchase contracts should be addressed to an attorney.
So what is a contingency in real estate? What Does NO Contingencies Mean?
Contingent vs Non-Contingent
Most home sale agreements include standard contingencies like seller disclosure statements, home inspections, loan contingency, appraisal contingency, title contingency, etc. Unmet contingencies are the main reason why many real estate offers fall through. But knowing what contingencies are and what role they play in real estate can help both sellers and buyers avoid costly mistakes they make when entering into home purchase contracts. "Contingent" in any sense means ‘subject to conditions'. When a property is listed as ‘contingent’ in real estate, it means a buyer has made an offer to buy a house, and a seller has accepted it, but some conditions need to be met before the deal can move forward.
A contingent offer works like this. Let’s say, and after months of home hunting, you found your ideal home. You reviewed the seller’s disclosure packet. But you’re not too sure about the condition of the property. So you made an offer contingent on a house inspection. And once the seller accepts your offer, the deal is now under contract. You obtained a home inspection within the contingency period. But the inspection report does not come out clean, and the property's condition is unacceptable. Since your deal is contingent on the home inspection, the contract is now put on hold pending the outcome of negotiations with the seller. The seller can either agree to repair the property or pays for repair credit (or negotiate some agreeable terms), or you can back out of the deal right away. You can use the “CANCELLATION OF CONTRACT, DISPOSITION OF DEPOSIT AND CANCELLATION OF ESCROW (C.A.R. Form CC)” to release your deposit money from the seller. This is the benefit of including a home inspection contingency in a home purchase agreement. It gives you more control over the buying process and allows you to withdraw from the agreement should the contingency fail to occur. More importantly, it protects you from being coerced to buy a house that does not reflect its purchase price.
An offer to purchase a house with one or more contingencies is referred to as a contingent offer in real estate. A home purchase contract can have any number of contingencies, either from the seller’s or buyer’s end. But in most contracts, contingencies come from the buyer’s side of the table. These contingencies must be met or agreed upon before a deal closes. If not, the contract can be terminated.
Keep in mind many sellers are hesitant to accept contingent offers. Having contingency clauses in an offer makes it look less appealing because sellers would forgo the possibility of a better deal coming through. This is one of the main reasons a seller should have ALL inspections done “before” putting their home on the market. Imagine you want to sell your condo, and you get it listed on the market. Would you prefer a buyer who comes with a conditional offer or a buyer who is willing to buy without conditions? What happens in a seller’s market with tight inventory and competitive buyers is that contingent offers often get rejected. Sellers are less likely to accept a contingent offer as there is no guarantee that the sale will proceed. Generally, a contingent offer would require a seller not to accept and negotiate with other buyers within the contingency period. In California, the default contingency period is 17 days from the date the offer is accepted. Unless a contingency removal is signed before the deadline specified in the agreement, the seller could possibly send the buyer a “notice to perform, and/or the buyer could ask for an “extension of terms”. The contingency period is the time period given to a buyer before which he is required to take specific actions and remove the contingency. All contingencies must be removed in writing using the C.A.R standard contingency removal form. Contingency removal indicates a buyer’s intent to proceed with the deal. If a buyer fails to honor the contract by removing the contingency, the seller is entitled to go with another buyer by following the terms in the purchase agreement.
What is a non-contingent offer? (buyer did not include any contingencies)
In a seller’s market, buyers are more likely to settle for non-contingent offers. A no-contingency offer in real estate (non contingent offer) is when a seller accepts a buyer’s offer, and there are no specific conditions to be met before the deal is complete. Unlike in a contingent offer, there are some items (contingencies) to be resolved before a non-contingent deal closes. In a fully non-contingent offer, the buyer is left with minimal opportunity to back out of the offer without putting their initial deposit in jeopardy, as all contingencies are waived.
Though non-contingent offers are comparatively riskier for the buyer, they are beneficial to win over sellers in a hot market. Non-contingent contracts are great for sellers as they shift risk to buyers. But how much of a risk is it? If a buyer is fully informed about the property's details through pre-sale disclosure statements, the risk will be far less. In non-contingent offers, as soon as the offer is accepted, the deal becomes a legally binding contract. By waiving all contingencies, the buyer forgoes his right to terminate the contract in most cases. If the buyer fails to complete the contract, the buyer risks losing their earnest money deposit.
What are some of the common contingencies in real estate?
What does contingent mean? Contingencies in a real estate market can originate from either buyers or sellers. But seller contingencies are less common: here are 2 of the possible seller contingencies; Rent-Back contingency and Sellers Purchase of Replacement Property contingency.
Buyer contingencies generally include;
- Investigation of Property contingency
- Mortgage/Loan contingency
- Appraisal contingency
- Title contingency
- Common Interest Disclosures (HOA Documentation (if applicable)
- and buyers' home sale contingency
These are the most common types of contingencies used in home purchase contracts. Below is an explanation of some buyer contingencies you might consider adding to a contingent real estate offer.
Seller Disclosure Statements
The residential purchase contract is contingent upon the buyer’s approval of the property disclosure statements as prepared and signed by the seller. In California, using the CAR Residential Purchase Agreement, there is an automatic 3-day right of rescission when the documents are received. The Transfer Disclosure Statement (TDS) is required in California unless the seller (or transferor) meets one of the following conditions: Court-ordered sales such as probate sales, foreclosure sales, sale by the bankruptcy trustee, and eminent domain.
Home inspection contingency
This is the most common contingency every smart buyer would consider adding to a house purchase contract. Unless a house is sold ‘as-is’ with the release of the Property Condition Contingency, many home sales are contingent on some repairs being effected or negotiated. Home inspection clauses include general home inspections, roof inspections, chimney inspections, termite inspections, plumbing, electrical system inspections, or any inspections the buyer chooses. It gives a buyer the right to have property inspected by a qualified licensed inspector within a specified number of days. After the buyer reviews inspection reports, he may negotiate with the seller under a ‘Buyer Request for Repairs’ to do necessary repairs to the property. When a seller agrees to meet the requested repairs or credit the buyer for repairs or lower the selling price of the property, an inspection contingency is removed.
Although not required, home sellers can perform the pre-listing home inspections before they list their homes for sale. This is an excellent idea and is usually in the seller's best interest. This allows sellers to fix any known and newly discovered issues with the property. Sellers must disclose material findings of all prior property inspection reports to prospective buyers. There is a default contingency period of 72 hours from when TDS was delivered for the buyer to approve the seller’s disclosure statements or cancel the contract. A pre-sale inspection without major issues would convince buyers to waive their home inspection contingency.
But there are real risks to a buyer if they agree to a deal without an inspection contingency. Suppose a buyer in a non-contingent contract later finds the property conditions unsatisfactory, and the seller isn’t likely to fix the issues. In that case, the buyer “might” be able to negotiate with the “new discovery.” In the event the buyer refuses to complete the contract, he risks losing the earnest money and incurring damages. So it is best to have as much knowledge of the property you are buying before releasing ALL contingencies.
HOA DOCUMENTS
For a property belonging to a Homeowner’s Association, a buyer may also want to look at HOA documents to discover possible issues raised in Homeowner’s Association meetings. . The sale of a Home Owner’s Association property is contingent upon the buyer’s review and acceptance of HOA documents. HOA documents include association bylaws, financial reports, Articles of Incorporation, CC&Rs, and other rules and regulations of the association. If it turns out that the property is in bad shape, the buyer can either negotiate with the seller to fix the problems or walk away from the sale if it is too costly to renegotiate the terms.
Mortgage/loan contingency (not an ALL CASH transaction)
In most real estate transactions, buyers apply for a bank loan or a mortgage before they make an offer to purchase a new home. For this purpose, buyers obtain pre-approval letters from lenders. Buyers include a financing contingency in their offers to give them enough time to secure finance. If a buyer is unable to receive financing within the contingency period, then he has the option to leave the sale. For example, when an underwriter denies a buyer’s request for a loan, buyer may cancel the sales agreement using the loan contingency clause. If the buyer obtains loan approval in time, he will need to send the seller a loan contingency removal before the scheduled closing date. Unless loan contingency removal is submitted, the seller is entitled to unilaterally cancel the contract and choose another buyer.
Appraisal contingency
An appraisal contingency is something that will be of interest to a lender more than it is to a buyer. Because appraisals go hand in glove with loan contingencies. Lenders generally do not like the prospect of losing more money than what the property is worth in the event a buyer defaults. Therefore lenders would not loan an amount higher than the market value of the property.
There are licensed home appraisers who will visit the property and assess its fair market value. If the appraiser’s report shows an appraisal gap (where the fair market value is lower than the purchase price), the bank will refuse to lend the full amount. Then the buyer will have to finance the value difference himself. Most contracts contingent on appraisals fall through where appraisal results in a gap, meaning if the buyer cannot finance the deal due to the bank not lending the full purchase price, he is free to walk away from the deal. According to a March 2022 survey by the National Association of Realtors, only 24% of all purchase contracts resulted in an appraisal gap. Only 7% of those buyers backed out from the deal.
NOTE: The lender should provide mortgage/loan and Appraisal contingency timelines.
Title contingency (Preliminary Title Report)
The title contingency clause gives skeptical buyers the option to get a title search done through a title company or an attorney. It ensures all title records are clean and there are no liens or judgments attached to the property. This type of contingency protects buyers against fraudulent sellers. Some buyers even secure title insurance policies to protect themselves against potential title claims. If the buyer discovers any issue as to the authenticity of the property title, he is free to back out from the deal within the contingency period.
Home sale contingency (Contingent on the Sale of the Buyers home)
Home sale contingency is one of the possible amongst buyers who look to sell their homes before buying a new one. It reduces the chance of a buyer being forced to pull up stakes while his existing house is on the market. In a contract contingent on a house sale, the contractual obligation to complete the sale becomes legally enforceable only when the buyer’s property is sold. Offers contingent on house sale is a good deal from a buyer’s perspective, but it is not so attractive to a seller. It is the least popular contingency among sellers. Generally, sellers do not accept offers contingent on a home sale if the buyer’s property isn’t ‘under contract’ or ‘in escrow’ at the time of accepting the offer. A house is under contract when a buyer’s offer is accepted. A house is in escrow when both seller and buyer have agreed to complete the contract after all contingencies are met.
In a home sale contingency, the buyer is not obligated to complete the purchase agreement unless his property is sold within the contingency period. On the other hand, depending on the availability of a kick-out clause, a seller who accepts a backup offer is entitled to an immediate right to notify the buyer to remove the home sale contingency within the contingency period (default is 72 hours). But this is not so in a contingent offer without a kick-out clause where the seller is bound to sell the property to the contingent buyer if the buyer sells his property before the closing date.
Sale and settlement contingency
An offer contingent on sale and settlement is useful when the buyer’s property is not ‘in escrow’. Being under contract is not the same as being in escrow. Though the two terms are used interchangeably, the property is under contract when the purchase agreement is signed by both the seller and buyer. The escrow process begins only after the deal is under contract and the seller and buyer are ready to transfer title documents and purchase money to close the deal. A contract contingent on sale and settlement cannot be completed unless the buyer’s property is not only under contract but also the property is in escrow. Such a contract allows a seller to continue marketing his property and accepting offers from prospective buyers. A contract contingent on sale and settlement materializes only if the contingent buyer has a contract in hand and a date is scheduled for the escrow process. If the contingent buyer fails to agree on a settlement date with his buyer, he can back out of the deal. However, under a sale and settlement contingency, unlike in a settlement contingency, a buyer is not protected if escrow fails to close on the scheduled settlement date.
Sometimes, sellers can include contingencies in home purchase contracts, too.
Rent-back clause
If you are a seller looking to sell your old house before buying a new one, a rent-back clause might be useful. Under a rent-back contingency, a seller can rent his old house from the buyer for a stipulated time period until the seller gets the keys to his new property. But there is a catch. Unless the seller offers a lower price or makes a compromise in a significant way, most buyers wouldn’t agree to rent the property back to the seller.\
Home of choice contingency (SELLER'S PURCHASE OF REPLACEMENT PROPERTY (C.A.R. Form SPRP)
A home-of-choice contingency is useful for a seller who has already found a buyer but wants to move into a new house before his old house is sold to that buyer. This is also referred to as “SELLER'S PURCHASE OF REPLACEMENT PROPERTY(C.A.R. Form SPRP.” Under this contingency, if the seller fails to find a new house within the contingency period, the contract falls through, and the seller is back in control of his property. The buyer will no longer be able to enforce the contract.
What is a kick-out clause? BACK-UP OFFERS AND SELLER RIGHT TO REQUIRE BUYER TO REMOVE CONTINGENCIES OR CANCEL.
A kick-out clause is essentially a seller’s response to a buyer’s offer for a home sale contingency. Home sale contingencies were rare in 2018 to early 2022 in the Silicon Valley and Bay Area real estate market. But if a seller receives an offer contingent on the selling of buyer’s property, it would be a good idea for a seller to introduce a kick-out clause. A kick-out clause would allow a seller to continue marketing and accepting backup offers from other buyers for a specified time. In a contingent offer with a kick-out clause, if the seller receives a written backup offer within the specified period, the seller can notify the buyer to remove the contingency and perform the contract. Unless the buyer responds to the notice in time by removing the contingency, the seller can withdraw from the existing contract and proceed with the new offer.
Can You Put in an Offer on a Contingent House?
When scrolling through an MLS listing, you fall in love with your ideal dream home. But it is marked as ‘contingent’. If you’re wondering, can you still put an offer on a contingent house? Before we look into this question any further, we need to understand that there are four different types of MLS listings depending on the stage of the sale process. When a property is on the market, it is marked as ‘active’ or ‘for sale’. Offers are considered when the listing status is active/for sale. A house is marked as ‘contingent’ when it is under contract, but certain contingencies must be met. Property is listed as ‘pending’ when the deal is ‘under contract,’ and all contingencies have been met pending the escrow process. A house is listed as ‘sold’ when it is off the market. A house that is listed either as ‘pending’ or ‘sold’ is no longer accepting offers and is officially off the market.
To be precise, a house listed as ‘contingent’ might still be able to take “backup offers”. This is because a contingent offer can fall through at any time due to the non-fulfillment of a contingency. If a contingent contract includes a kick-out clause, and the initial buyer fails to honor the contingency, there is a high chance for an attractive backup offer to win the bid. So if you’re eying on a contingent property, it is worth hanging in.
Non-contingent offers in real estate look more appealing to sellers. Conversely, "contingent offers" may be much more secure and far less risky for a buyer. Contingent buyers can cancel their offers anytime (before releasing all contingencies) if they encounter unexpected issues and certain conditions are met. Latest NAR statistics show that only a fraction of real estate buyers are waiving appraisal and inspection contingencies. This downward trend can be attributed to increasing home prices in the real estate market. More buyers are looking to pay for only what is worth their money. But depending on the market conditions, whether you are looking to buy or sell a house, there are pros and cons to contingent and non-contingent home sales. Working with an experienced real estate professional will help determine whether a contingent or non-contingent offer works best in your situation.
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