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Placing an offer on a home is risky. You’re signing a legal contract that binds you to the sale no matter what happens. What if the home isn’t what the seller advertised, though?
It’s a risk millions of buyers take every day, but there’s a way to protect your offer by making it contingent.
A contingent offer creates a level of security, reassuring you that you can back out of the sale and not lose money under certain circumstances.
What Is a Contingent Offer?
A contingent offer is an offer to buy a house with conditions. If the conditions aren’t met, the buyer can back out of the contract, keeping their earnest money deposit. If the conditions are met, the sale will go on like a normal sale.
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How Do Contingent Offers Work?
Contingent offers are offers with conditions. For example, you can give an offer of $150,000 contingent upon the home inspection.
The seller must consider the price ($150,000) and the condition or contingency. The contingency gives the buyer a way out of the inspection comes back with ‘issues.’
All contingent offers have an expiration date. If the buyer doesn’t use the contingency within the allotted time, the contract becomes legally binding. If the buyer backs out after the contingency expiration, the seller can keep the earnest money.
But, if the buyer exercises the contingency and backs out of the contract, the buyer keeps their earnest money.
But what about sellers?
Fortunately, they have a say too. First, they don’t have to accept a contingency. If they don’t like it, they don’t have to accept it.
They also have the option to accept it with or without a kick-out clause. The kick-out clause states that the seller can accept other offers during the contingent period of your contract.
If a better offer comes along with no contingencies, the seller can accept the bid after giving you notice of the bid and the intent to take it. If you can’t meet the demands, the seller can sign a contract with the other buyers.
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How Long is a Contingent Offer Good For?
No two offers are good for the same amount of time. Buyers make their offer, which could be a contingency for 14 days or 30 days. Some go as long as 60 days.
Sellers usually want to minimize the time their home is off the market and in limbo, but each seller must decide what they’re comfortable with when accepting an offer.
What Are Some Common Contingencies?
It is important to know the different types of contingencies, how they work, and when to consider using them when buying a house.
Appraisal Contingency
The appraisal contingency gives buyers time to see how much the home is worth. Just because a seller lists a property for a certain amount doesn’t mean it’s the fair market value.
Lenders won’t allow financing on a property that isn’t worth at least as much as the sales price.
If they do, they’ll base your loan amount on the appraised value, not the sales price leaving you to make up the difference between the sales price and loan amount.
Mortgage Contingency
A mortgage contingency gives buyers time to secure financing. Even if you’re pre-approved, financing can fall through.
If you’re worried about your chances of final loan approval, a mortgage contingency may give you a couple of weeks to solidify your financing and reduce the risk of it falling through and you losing your earnest money.
Home Sale Contingency
If you own a home that you must sell to buy a new home, you may want a home sale contingency.
Timing both sales simultaneously can feel impossible, so the contingency gives you a little time to secure a contract on your home to ensure you’ll have the money to close on your new home on time.
Home Inspection Contingency
The home inspection contingencyprotects buyers from buying a home that’s not in good shape.
Even if the home seemed great when you walked through it, you don’t know what’s going on in the home’s system and structure.
For example, if the house needs a new roof or there are major water leaks, you may not want to invest in it knowing it needs thousands of dollars in repairs before you can live in it comfortably.
Title Contingency
The title contingencyprotects you should there be any other liens or claim to ownership on the title.
This is a rare contingency, but if you did some research on the house and worry about the chain of title or that the owner has liens on it, you can add this contingency and wait for the title report to decide if the home is safe to buy.
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Can You Make an Offer on a House that Is Contingent?
There’s nothing stating you can’t make an offer on a house that’s contingent, but the seller likely won’t do anything with the offer unless the original offer falls apart.
If the seller has a kick-out clause on the original contract, they can accept other offers on the property and take them over the original offer.
To do this, the seller must give the original buyer plenty of notice of the new offer to see if they will end the contingency and make the contract legally binding.
How Are Pending Offers and Contingent Offers Different?
Pending offers and contingent offers are two different things. A contingent offer has a condition on it – it’s not a complete offer until the contingency ends.
A pending offer is an offer that all conditions or contingencies are cleared, and everyone is waiting for the transaction to head to the closing table.
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Bottom Line: What Is a Contingent Offer?
Most offers today have some type of contingency, whether it’s a home sale, mortgage, or home inspection contingency.
A contingent offer protects buyers, reassuring them that the purchase is a good one and they aren’t getting taken advantage of in any way.
While you don’t want too many contingencies on your offer, protecting yourself the way you think is best is important when buying real estate.
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