Real Estate Contingencies
What does contingent mean in real estate?
Homeownership offers personal and financial perks. Yet, the plunge into a real estate transaction requires considerable care. Once accepted by a seller, your offer becomes a legally-binding bilateral contract. Without the right language and provisions, you may find yourself bound to a deal that you cannot complete without significant cost and expenses. Also, making an offer to buy doesn’t automatically mean you’ll become the home’s owner.
In dealing with these issues, it is important that you understand pending contracts and contingent ones in the real estate field.
What is the difference between pending and contingent?
Of course, every real property contract has the requirements that the buyer pay the purchase price and that the seller delivers a deed with clear title. That is, you as a buyer generally get your property free of prior mortgages, judgments or other claims against the property except for those that you specifically agree to assume. Between the time you sign the contract and closing, a lawyer will perform a title search to ensure you’re getting good title.
However, money and good title are not really contingencies. In other words, realtors treat contracts as pending when all that remains to be done is to exchange the money and a deed. Homes under pending contracts typically are not actively listed, and making offers on them usually represents an exercise in futility.
By contrast, a contingency in a contract is a condition to be satisfied beyond the essential requirements common to all real property agreements. These conditions are items that, if they don’t happen, result in cancellation of the contract and elimination of the need for any legal work to close. As such, contingent properties remain actively listed.
Examples of Contingencies
- Financing – Buyers may want purchases to be contingent upon their obtaining financing. This means a contract doesn’t happen unless you have a loan to pay for the purchase price. The fact that you have been pre-qualified for a loan doesn’t necessarily translate to satisfaction of the financing contingency. Lenders’ subsequent concerns over creditworthiness and the absence of an acceptable appraisal could delay final funding of the purchase by the lenders. For fairly impatient sellers, financing or loan delays can end a purchase deal. Such sellers may be weary of your ability to obtain financing as a prerequisite to a sale. With the prospects in mind, you might want to consider either a full-cash sale or having a sizable down payment. Large down payments tend to reduce the amount of the price you have to finance. If you have to go the mortgage route, you will want to take steps well in advance of home shopping to shore up your credit scores and minimize your debt load. Such actions often speed loan applications as lenders may have less concerns about the risk of default.
- Home Inspection- This condition does not involve inspections conducted by building code officials on new homes. A governmental building inspection answers the question whether a new construction complies with state or local codes for mechanical, framing, plumbing, electric and other phases of construction. An approved home results in a certificate of occupancy. Without it, a home cannot be occupied.When we speak of home inspection contingencies, we refer to a review of the home’s condition by a private inspector. Home inspections generally examine the structure as a finished product for potential defects and go beyond the requirements of building codes. Often, a home inspection is a great way to make sure your realtor is not puffing. Examples include squeaky or weak floors, light switches that don’t work, the absence of hot or heated water and broken knobs. A home inspection contingency often exists with preoccupied or preowned homes where no new home warranty exists. The real estate contract may specify that any problems discovered by a home inspection must be fixed as a condition of closing.
- Insurance – The presence of real property in places prone to hurricanes, flooding, earthquakes and other disasters makes insurance costly, if not out-right unattainable. Buyers may place as conditions the ability to obtain homeowners or hazard insurance. Federal law requires you to have flood insurance if the home is located in a flood zone designated as such by the Federal Emergency Management Agency (FEMA) and you are getting a mortgage.Insurance conditions address title defects as well as physical hazards to the property. You might have a contingency that you can obtain title insurance. This covers claims of other owners or creditors or in the event of encroachments or easements not previously discovered or apparent. This affords you a way to pay for defense of claims against your property.
- Zoning. The home that you are purchasing is located in a governmental zoning district that likely already allows homes. If you’re buying especially undeveloped real property, you should check with your local government zoning department to see if residential use is permitted. If not, you likely need to include a contingency in the contract that the local government rezones the property to allow residential use.
- Appraisals – An appraisal contingency aims to make sure that you’re not overpaying for a home. This may take the form of a requirement that a certified appraiser value the home for not less than the purchase price. Lenders place minimum appraisal requirements in loan packages to protect against a home being “underwater” at the outset of the loan. An “underwater” property is one where the balance owed on the loan exceeds the market value of the home. Given that foreclosure sales are “distressed” transactions in the first place, lenders for defaulting owners often do not receive full satisfaction of their loan balances.Selling an Existing Home. One of a buyer’s worst nightmares lies in having to pay two mortgages on different homes at the same time. As a preventative measure, a buyer will make purchase of the new home contingent upon the sale of the current one. These contingencies carry risks of real estate deals not closing because the sale of the current home is at the mercy of finding a qualified and satisfied buyer. The seller of the home you are buying may be hesitant to wait for your current home to sell.
Can you make an offer on a house that is contingent?
The answer is generally yes. There exists no legal prohibition to you making such an offer. With a house under a contingency contract, your offer acts as a “back-up offer.” You stake a place in line or otherwise express your interest in the home. Should the previous prospective purchaser not be able to fulfill the conditions, then that prior contract is cancelled.
Don’t treat the prior failure of conditions as your green light to buy.
You might need to examine why the preceding deal failed. If the contingency in question involved a home inspection or is tied to the home’s condition, beware that you are not plunging into a home with faulty wiring, plumbing, structure or other problems.
Does contingent mean sold?
In reality, no home is “sold” until the seller has received money and the buyer has obtained the bundle of rights.
This happens in a real estate closing after all contingencies have been satisfied, the property transitions to a pending status, the transaction is funded and the documents are prepared and signed. That a sale is final at closing doesn’t mean that the seller’s real estate broker must await closing to get the commission.
Subject to the contract and your state’s particular law, a real estate commission becomes due when the broker supplies a “ready, willing and able buyer.” This means that your seller’s broker need not await disbursement from the closing lawyer or other closing agent or even the signing of a contract.
This legal principle might protect you as a buyer in that the seller may be more motivated to honor your offer rather than accept others while your house is under contract — whether conditional or pending.