What is a contingent offer?
It allows a buyer to back out of a home purchase if a condition isn’t met
When buying a home, it’s important to know your rights as a buyer. Home purchase agreements are legally binding and require you to follow through on your offer to purchase a home; however, contingencies can be built into your offer to give you more flexibility, allowing you to back out of a home purchase without losing money.
Contingent offers are a normal part of the homebuying process and help protect buyers in case of surprises along the way. We’ll go over the details of how contingent offers work, what types of contingencies are common and how to use contingencies to negotiate a home purchase.
- A contingent offer is an agreement to purchase a home if certain conditions are met.
- Contingencies may be included for appraisal, home inspection, financing and the buyer’s own home sale.
- A contingent offer might be seen as a weaker offer in a seller’s market, but it helps protect buyers from failed inspections, low appraisals or financing issues.
Contingent offer meaning
In real estate, a contingent offer is an offer to purchase a home but with clauses that protect the buyer should certain circumstances arise. A contingency is presented to the seller by the buyer’s real estate agent or the buyer themselves. It allows the buyer to back out of the transaction if a contingency isn’t met.
“A contingent offer in real estate refers to an offer to purchase a property that is contingent upon certain conditions being met,” said Jenna Alberta, owner of real estate investing company Mobile Home Buyers. “A contingent offer typically includes conditions such as the buyer securing financing, a satisfactory home inspection or the sale of the buyer's current property. If any of these conditions are not met, the buyer can withdraw from the offer without penalty.”
Contingent offers primarily protect homebuyers, giving them a way out of a binding purchase agreement on a home. For example, if you agree to purchase a home as long as it appraises for at least the agreed-upon price, then you have made a contingent offer. If the appraisal comes in under the agreed-upon price, you can walk away from the transaction without penalty or negotiate the price down to meet the appraised amount.
Types of contingencies
Several types of contingencies can be added to an offer to purchase a home.
An appraisal contingency gives you the ability to walk away from the transaction without penalty if the appraisal comes in lower than the purchase price. If you decide to purchase the home anyway, you can try to negotiate the price down closer to the appraised amount.
Mortgage preapproval can help speed up the financing process by allowing you to go through most of the lending paperwork before you submit an offer. This allows you to shorten the financing contingency to make your offer stronger for the seller.
» COMPARE: Best mortgage lenders
You can also use this contingency to require that sellers fix the issue before proceeding with the transaction or lower the price of the home to compensate for the issue. For example, if there is a leak discovered in the roof, you can ask to have it fixed or to be compensated for the cost of repair before agreeing to purchase the home.
Home sale contingency
If you cannot find a buyer for your home within the time allotted, you can back out of the transaction. But it’s important to note that a home sale contingency constitutes a weaker offer, as sellers will be depending on you to sell your home in order to sell theirs. In a seller’s market , these offers may get rejected more often than not.
Even if there are no title issues during the purchase, it’s a good idea to get title insurance , which protects against any future claims on the title.
How does a contingent offer work?
A contingent offer is common practice in real estate purchases, and most purchase agreements that are submitted with an offer have a section to add in contingencies.
“The duration of a contingent offer can vary, but it is typically a period of one to four weeks,” said Alberta. “During this time, the buyer has the opportunity to satisfy the contingencies and move forward with the purchase or negotiate for repairs or adjustments.”
Here are the steps to making a contingent offer:
- Indicate contingencies in your purchase agreement. In many state purchase agreements, there are options for contingencies built into the form. Indicate which contingencies you wish to require. For example, if you need to sell your home to make the purchase, indicate that this offer is contingent on the sale of another property.
- If a contingency is not met, make a choice. After the offer is submitted, you will continue the process of buying the home, which will include a title search, inspection, appraisal or the sale of your current home. If a contingency is not met during this process, you can choose to continue with the offer and negotiate, or you can walk away without penalty and receive your earnest money back.
- Negotiate based on the unmet contingency. If you’re still interested in purchasing the home despite the unmet contingency, you can now negotiate. For example, if the home inspection shows termite damage, you can ask the seller to remedy the problem or drop the home price by the cost of termite damage repair. There may be several contingencies in your offer, so each unmet contingency is a point of negotiation and gives you the ability to walk away if needed.
- Sign the purchase agreement and close on the home. Once you and the seller come to an agreement, you can move forward and close on the home.
» MORE: How to buy a house
Can I waive contingencies?
“Contingencies can sometimes be waived if the buyer is confident in their ability to secure financing or if they are willing to assume any potential risks,” said Alberta. “However, waiving contingencies is not a decision to be taken lightly and should be done after careful consideration and consultation with professionals.” Waiving contingencies makes your offer stronger, but you sacrifice security as a buyer.
How long does a contingent offer last?
Contingent offers can last as long as you want, but sellers won’t want to wait forever to resolve unmet contingencies. For example, if you write in a home sale contingency that gives you six months to sell your home, the seller may require a kick-out clause that allows them to keep their house on the market to field better offers. Typically, 30 to 60 days is a reasonable length of time for a contingent offer, but it depends on your offer, the seller and your market.
Can a seller back out of a contingent offer?
Sellers can write their own contingencies into the purchase agreement, which allows them to back out of a contingent offer. For example, the seller can set a deadline for all purchase offers, allowing them to back out if a buyer cannot complete the purchase in the allotted time frame.
What happens after all contingencies are removed?
If all contingencies are removed from a purchase agreement, the buyer is contractually on the hook to purchase the home. This means the buyer is accepting the property in its current condition. If the buyer backs out for any reason, the seller may be able to keep the earnest money put up by the buyer.
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