How Do Contingent Offers Work in Real Estate?
When purchasing a home, you need to go through a long and possibly stressful process. A home sale is only finalized once the keys have been handed over to you on closing day. That means that a deal can always fall through at any point before it.
To show that you’re serious about buying the property, you might have to put in earnest money that works as a deposit. In most cases without contingencies, if the deal falls through at any point, you could cancel the contract. But you can’t get your deposit back.
This is where a contingency clause could save you and let you get your money back. A contingent offer sets conditions that must be met before a home sale is finalized. Let’s take a closer look at how they actually work in real estate.
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How Do Contingent Offers Work?
Contingent offers work largely for the benefit of the buyer. If you want to make sure you can walk away from a deal without any attachments or consequences, go for a contingent offer.
Some contingent offers also benefit sellers. There are instances where they can keep their listing on the market until the sale is finalized. Doing so lets them receive backup offers for the property in case yours falls through.
But once the seller accepts your contingent offer, you always have the right of first refusal (ROFR). This means that the property cannot be taken away from you or sold to someone else without proper notice.
In these cases, the seller will give you a certain period of time where you can finalize the sale and meet their requirements. Failure to do so means that the property can be offered to others.
You should still let the seller know if you cannot comply with the requirements on time, though. It’s part of your responsibility as someone who made the contingent offer. Sellers can file a lawsuit or void your earnest money if you fail to inform them.
Since contingent offers benefit the buyer more than the seller, some sellers may reject the offer. If the market is competitive and the demand is high, most sellers would go for clean offers that have no contingencies.
If the seller doesn’t reject your offer, they could either accept your offer as it is or provide a counteroffer. The counteroffer usually has fewer contingencies or none at all. The important thing to remember is that you and the seller should agree on everything stated in the contract before you sign it.
5 Types of Contingencies
If you’re planning to apply for a mortgage to pay for the home, you might want to add a mortgage contingency clause to your offer. This should state that you’re allowed to cancel the offer if your mortgage application gets rejected or doesn’t get approved on time.
A mortgage contingency has better chances of being accepted by the seller if you’ve already been preapproved for a mortgage. This doesn’t guarantee that you’ll get the loan. But it’s a great assurance to the seller that you can be able to pay for the house.
Home Appraisal Contingency
A home appraisal contingency means that you should be allowed to walk away from the deal and get your deposit back if the home’s appraised value is lower than expected.
Mortgage lenders require a home appraisal before approving your loan application. If it turns out that the selling price of the home is higher than its actual value, your loan application might get rejected.
You might also find that you no longer want to push through with the home sale since it won’t be worth it. You could negotiate with the seller to lower the price of the home according to its actual appraised value. But if they don’t agree, an appraisal contingency clause in your offer lets you back out from the deal with no strings attached.
Home Inspection Contingency
After placing an offer for a home, you’re allowed to have it inspected anytime before the closing day. A home inspector assesses the house’s condition and makes sure that there are no damages—major or minor—to the property.
If there are any issues with the house, you can negotiate with the seller and have them fix these issues before the closing day. You could also ask the seller to reduce the selling price depending on how much the repairs cost.
If the seller doesn’t agree, an inspection contingency clause gives you the right to take your offer back together with your escrow deposit.
Home Sale Contingency
One of the more difficult contingencies to get sellers to agree with is the home sale contingency. This is for when you’re selling your home and buying another at the same time.
A settlement contingency clause is usually added if you already have an offer for your property and are just waiting for the closing day. This has a better chance of getting accepted by the seller.
A sale and settlement contingency clause, on the other hand, is for when you’ve already put your property on the market but are still waiting for offers. This type of home sale contingency is often rejected as it’s quite a big risk for sellers as well.
If there are a lot of offers on the property, any offers with home sale contingencies are almost always rejected. But if you’re buying a property in a buyer’s market, you might have better luck.
A title contingency clause simply states that the home sale will not push through if there are any issues with the land title. This covers all disputes, claims, and liens related to the property.
Lenders usually run a title search before approving your mortgage. They also charge you for title insurance that protects them from all title-related issues with the property.
You can apply for title insurance as well for added security. This will compensate you for any loss you might incur with title disputes and the legal fees related to it.
Having a title contingency lets you cancel the offer if there are any title-related problems along the way.
What Happens If There is No Contingency?
In most cases, having no contingency puts you at a disadvantage. A lot of things can happen between placing an offer for a home and closing the sale.
Besides running into unexpected issues, you might also find yourself wanting to back out of the home sale. This tends to happen especially when things start to get complicated. There’s no problem with that—if you have a contingent offer.
Your earnest money is a big amount that you’ll never get back when you place an offer without contingencies and the deal falls through.
But there are also cases where having no contingencies could work in your favor. Yes, we’re talking about bidding wars and highly-competitive markets. In these cases, clean offers prove to be more attractive for sellers who just want to sell their property as soon as possible.
Be careful, though. Having no contingencies means that you should be prepared for the possibility that you’ll get less than what you pay for. A property could need a lot of repairs or sell for a higher price than its appraised value.
Before placing a clean offer, make sure you can account for the worst-case scenario in the home sale.
Placing Competitive Offers
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The Canadian housing market is projected to still do well this 2022, although market conditions are starting to return to normal. If you’re keen on owning a property, it’s better to get on with it before the rates start rising in the second half of the year.
Whether you’re looking for small units like a condo or a full-on house, it’s important to know how to place a competitive offer on the property. Ask for help from a real estate professional. They will know which contingencies to include in your offer and make sure that you still have a high chance of securing the deal.
To recap, here are the different types of contingencies you can add to your offer:
- Mortgage contingency for when your mortgage gets rejected or doesn’t get approved on time.
- Home appraisal contingency for when the home’s appraised value is lower than its selling price.
- Home inspection contingency for when the house turns out to not be in its best condition upon inspection.
- Home sale contingency for when you’re buying and selling a home at the same time.
- Title contingency for when there are issues with the property’s title.