The Meaning of Contingent in Real Estate Contracts

Key Takeaways 

• Contingency clauses give parties to real estate contracts the right to cancel or back out of the deal if something goes awry during the sale process. 

• A home listed as contingent means that while the sellers have accepted an offer, the sellers are not completely removing the listing until certain conditions are met.

• A property listed as “pending” means contingencies have been met and the closing process is near.

It is essential for potential property owners to understand the term “contingencies” since the vast majority of real estate contracts — about 80% — contain them, according to the National Association of Realtors (NAR). 

These clauses give parties to such contracts the right to cancel or back out of the deal if something goes awry during the sale process. Here is everything real estate investors should know about contingencies and how to navigate them.

Common Contingencies in Real Estate

There are a number of different types of contingencies in real estate, including:

Home Inspection Contingency

Also called a “due diligence contingency,” a home inspection contingency seeks to protect buyers by giving them the right to have the property inspected before going through with the offer. The homeowner has a certain number of days — typically seven to 10 — to object to any inspection findings.

This contingency aims to ensure that the purchaser has sufficient information to make an informed decision. As of 2023, 79% of contracts included an inspection contingency while 82% contained an appraisal contingency, the NAR reported.

Appraisal Contingency 

This is a contract provision that permits property buyers to get out of their agreement if the real estate is appraised for less than the purchase price in the contract. This can give such buyers peace of mind if the appraisal comes in lower than the offer.

Mortgage Contingency 

With this clause, home buyers have a time frame, usually 30 to 60 days, during which a mortgage loan must be secured. If the loan is not secured, the buyer can walk away with no legal consequences and have their deposit returned.

Home Sale Contingency

Here, if the buyer does not sell their property before a predetermined date, the contract may be terminated. So, the agreement is “contingent” upon the sale of the purchaser’s existing home. If the home is not sold, the buyer or seller can leave the deal.

Benefits and Risks of Contingent Offers

As with most things, there are benefits and risks involved with contingencies, for buyers as well as sellers.

For the buyer, contingent offers provide flexibility. They give buyers time to secure financing, sell and close before committing to a new house, or to resolve other issues. Such flexibility can especially benefit first-time home purchasers or those with a relatively small down payment.

Contingencies also protect buyers in the event that something goes wrong, say with the home inspection or appraisal. Only 4% of real estate contracts in the spring of 2023 were terminated, according to the NAR.

There are risks for sellers who accept contingent offers. For example, there is no guarantee the property will sell, there is always the risk that the deal could fall through. Further, some home shoppers avoid properties under contract since they ultimately may never have a chance to buy them. Another drawback for sellers is that it does take time to address a buyer’s contingencies.

Different Types of Contingent Statuses

Within contingencies are various contingency statutes. Those include:

— Contingent – Continue to Show (CCS). With CCS, sellers are allowed to continue marketing the property while the buyer works on the contingencies.

— Contingent – No Showings (CNS). Here, the seller agrees to discontinue showing the property to potential buyers during the closing period, giving the buyer additional security. The seller is typically amenable if they believe their buyer will come through.

— Contingent – With Kick Out (CKO). With this clause, the seller may continue showing the home and may accept a new offer that comes sans contingencies. In effect, this provision “kicks out” the contingent offer if a better one shows up within a specified time (typically 72 hours). 

— Contingent – Release Kick Out (RKO). With a release clause, the seller specifies the time frame during which the buyer must be notified that the agreement is canceled. It aims to protect the seller against being stuck with a contingent buyer who, whether working with an agent or not, cannot get their home sold.

Difference Between Contingent and Pending Statuses

Those who scour the latest real estate sites for opportunities may come across the terms “pending” and “contingent.” While they both indicate how close the property is to being sold, there are differences.

A home listed as contingent means that while the sellers have accepted an offer, the sellers are not completely removing the listing until certain conditions are met. On the other hand, “pending” identifies listings where contingencies have been met and the closing process is near.

How Contingencies Impact the Real Estate Transaction Process

Depending on each deal’s specifics, strategies for negotiating contingencies can vary and it may be wise to hire an agent. The aim is for both parties to strike a balance between their sought-after terms and the other party’s amenability in accepting them. An ideal arrangement meets all needs and reduces risks.

For example, say a buyer makes an offer but has a contingency for securing financing within 30 days. Subsequently, the seller proposes a higher price and a tighter financing deadline. While the higher price is then accepted, the buyer seeks 45 days to obtain a mortgage. The seller accepts the updates offer and the transaction moves forward.

Strategies can include:

• Timing the offer. Factor in local market trends when timing an offer. That means knowing whether the current market is more favorable for buyers or sellers.
• Leveraging market value. Determining the strength of one’s negotiation position calls for understanding a property’s market value. Knowing the perceived and actual value of area homes can help guide how offers and contingencies are presented.
• Offer understanding. Empathizing with the other party’s concerns and needs are essential when discussing contingencies and can ultimately help achieve mutually beneficial solutions.

Contingency clauses give a party the contractual right to cancel the deal or renegotiate if specific circumstances are found to be unsatisfactory.

Real Estate Investing

While every investment carries risk, real estate remains a popular way to generate income and grow wealth.

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Footnote: Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.

Alternative Investments and Portfolio Diversification

Alternatives can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.

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Summary 

Real estate transactions can be complicated, particularly when it comes to contingencies. That is why it is essential that both parties have a thorough understanding of all the various contingencies, the implications involved, and the role negotiation plays. 

In general, real estate remains an effective way to grow wealth and diversify investment portfolios.

Note: All securities involve risk and may result in significant losses. Alternative investments involve specific risks that may be greater than those associated with traditional investments; are not suitable for all clients; and intended for experienced and sophisticated investors who meet specific suitability requirements and are willing to bear the high economic risks of the investment. Investments of this type may engage in speculative investment practices; carry additional risk of loss, including possibility of partial or total loss of invested capital, due to the nature and volatility of the underlying investments; and are generally considered to be illiquid due to restrictive repurchase procedures. These investments may also involve different regulatory and reporting requirements, complex tax structures, and delays in distributing important tax information. Diversification does not ensure a profit or protect against a loss in a declining market. This tool is for informational purposes only. You should not construe any information provided here as investment advice or a recommendation, endorsement, or solicitation to buy any securities offered on Yieldstreet. Yieldstreet is not a fiduciary by virtue of any person’s use of or access to this tool. The information provided here is of a general nature and does not address the circumstances of any particular individual or entity. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of this information before making any decisions based on such information.