Understanding a Contingent Offer and When to Make One

What is a contingent offer? 

Technically speaking a contingent offer simply means that there are contingencies in your contract that are required to be cleared in order for you to close on the purchase of a home.  Generally, contingencies are put in place to protect a buyer from having financial penalties or repercussions if they are unable to close on the home.

Making your offer to purchase a home contingent is a double-edged sword as it’s a great way for a buyer to protect themselves but that isn’t typically the main concern of the seller. In a seller’s market the seller may also be getting non-contingent offers and may feel that it’s risky for them to accept a contingent offer. Please understand that there are a number of different types of contingencies that may be added to a contract, some have become more standard while others may cause seller’s to raise an eyebrow, or at minimum pause to consider the implications of the contingency. Each contingency is essentially another place where the buyer could try to escape the contract. 

Common Contingencies

In many states the following contingencies are built into contracts and/or are considered standard in a purchase agreement:

Appraisal Contingency: This requires the homes value as determined by a licensed appraiser to come in at the contracted sales price; if it does not meet that requirement then the buyer reserves the right to re-negotiate the price or back out of purchasing the home. Please note that in some situations, the buyer can build in an allowable amount of deviation from the sales price; this is more common in a sellers market. 

Financing Contingency: Broadly, this states that the buyer must secure financing within a specific time frame or they can back out of the contract. This contingency cover wide range of circumstances that could arise that would keep the borrower from being able to qualify to buy the home.

Home Inspection Contingency: A home inspection is a service that is provided by a licensed third party that comes and inspects the home for structural safety, soundness, whether the home is up to code and notes any and all findings or concerns they have with the property. If you choose to write in a home inspection clause (sometimes waived in multiple offer situations) you will have a certain amount of time in which you can get the home inspection performed and review the results. This is another opportunity that would allow a buyer to request a re-negotiation, request repairs or terminate the contract. 

Title Contingency: This requires the seller’s to provide clear title to the property that is free of defects or findings before the sale of the home can be completed. 

Situation-Specific Contingencies

Home Sale Contingency: This contingency is used when a buyer also owns another property for which they are stipulating must sell before they are willing or able to close on the new home. When this situation exists, this type of contingency is very common to ensure the buyer doesn’t end up with two homes at once but it can be a turn off to a seller. This contingency opens up the door for another set of people to potentially impact the outcome of their sale since everything on the buyer’s property they are selling must also fall into place in order for them to buy the new home.

A buyer has the option to make a non-binding contingent offer. That simply means that the buyer’s offer is good if they sell their house and secure financing. In the meantime, the seller is not obligated to take the house off the market and can entertain other offers.

Why a Seller Might Accept a Contingent Offer

Some sellers know they have hard-to-move homes, so a contingency offer is a good deal. Maybe the house needs upgrades. Perhaps it’s in a tough-to-sell neighborhood. Or maybe the seller has placed a very high price on the house, and they’ve found a buyer that is willing to consider their “dream” price. 

The primary advantage for the seller agreeing to a contingent offer is that they can more or less take the house off the market while the financing is completed. If the seller believes the buyer is a safe bet to receive the financing for the home, it takes the hassle of marketing the house off their mind. 

In order for a seller to determine the risk of the contingency they should require a pre-approval from the buyer, they should understand the current status of the home the buyer is selling (is it already on the market, do they have an accepted contract, how long has their home been listed, etc.) and the seller should work closely with the agent who is representing them to determine the marketability of the home the buyer is trying to sell.

Try to Make a Non-Contingent Offer

The reality of house hunting is that few buyers can afford to pay cash for a new house or afford to pay on two mortgage loans payments so a non-contingent offer may not be an option but in order to determine the options you have the best first step is to talk to your lender. Your lender can coordinate with your real estate agent to define some paths that are available to you and find out if making an offer without the contingency of selling your home first is an option. Most sellers are eager to sell their homes and move on so are more likely to pick a non-contingent offer first. 

While non-contingent offers are attractive to sellers they aren’t always the best option for buyers. Sometimes they simply aren’t an option due to qualifying while other times a person could qualify but has a lower tolerance for risk and simply isn’t comfortable with the option. Before writing a non-contingent offer ensure you have considered all aspects of what that implies, most common to consider is monthly payments, down payment funds, moving coordination and current market conditions amongst other things.

Always start your journey with a consultation with your personal loan officer, who can help you understand your options when it comes to financing your new home.