- 13 Apr
You’re looking to buy a home and see that the sales status says “contingent.” Does that mean you can still try to buy it; still put in an offer for what might be your dream home?
Unlike “pending,” where everything is over but a few final strokes of a pen, or “for sale,” a house listed as “contingent” is somewhere in the middle. A third party can still make an offer, but that offer might only move forward if one of the buyer’s or seller’s walkaway contingencies is triggered. In fact, you still should make an offer: 44% of houses sell in a month or less, leaving a small window for purchase should the original buyer back out.
We’ve collected examples of contingent clauses in real estate contracts and how likely they are to be encountered during the purchase or sale of a home.
A Contingency Allows One Party to Walk Away
There’s a reason a contingency is often referred to as a “walkout” or “walkaway” clause — it allows one party (usually the buyer) to back out of a home sale without penalty or repercussion.
Purchasing a home is a complex process and is often the largest expenditure many people will ever make. There are inspections, escrow, and the legal minefield that is a letter of intent. Contingencies are put in place by buyers, sellers, and lenders to prevent unscrupulous parties or simple bad luck from putting anyone in an untenable financial situation.
Here are a few of the contingent statuses you might see on a listing:
- First Right: This status allows the seller to back out of an offer if the buyer can’t match other offers.
- Kick Out: This status means a seller can kick an offer out of the way for a better offer. This isn’t very common (or legal in some areas), but it may come up if the buyer is waiting for their current house to sell, which brings us to the next status.
- First Refusal: This status indicates that the purchase won’t go through if the buyer can’t sell their current property.
The most common real estate contingent clauses protect either buyer, seller, lender, or all three.
The Most Common Contingent Real Estate Clauses
Not all real estate deals come with contingencies, but some are extremely common (if not required by local law).
- Home Appraisal. A home appraisal is a common contingency that protects the buyer, lender, and seller. An independent home appraisal ensures that the home isn’t being purchased above or below its worth. This contingency allows offers to be altered or backed out of entirely should the fair market value not match the offer.
- Financing and Mortgage. This clause makes the purchase dependent on financing. The offer has been put in by the buyer, and the seller can accept no other offer at the moment — though they can still list the house as active and stack up offers just in case. The buyer has been pre-approved for the loan at this stage, but all is not written in stone. Should lenders and underwriters find no issue with the buyer’s finances or the loan amount, then the sale will go through.
- Clear Title. Another common (often legally required) contingent for real estate purchases, the title is a record of who has owned the property and whether there are any liens or other judgments against the property. Usually, this investigation is done by a dedicated title company. Should the investigation turn up any complicated legal entanglements or unclear ownership on the title (issues that can’t be easily resolved), the purchase can be safely voided.
- Home Inspection. Often either legally required (and/or demanded by the lender), the home inspection contingency is a good idea in any situation. Home inspectors will check that a property is structurally sound, up to code, and doesn’t have any disastrous surprises in store for potential home buyers.
- Inspectors may also check sewer system conditions, look for termites and other pests, and mark the existence of hazardous materials like asbestos, radon, or mold present in the house. Should inspectors find problems, big or small, it doesn’t mean the offer is retracted. It simply gives the buyer the opportunity to walk away, alter their offer, or negotiate with the seller to make repairs before the sale.
These are not the only contingencies that could affect a sale: there are less common contingencies you may run into during the buying and selling process.
Less Common or Regional Real Estate Contingencies
Some contingent real estate clauses have gone out of fashion or may simply be too niche to come up very often. Other contingencies are regional, perhaps owing to unique zoning, geological, or weather conditions.
- Early Occupancy. This contingency allows the buyer to rent out the for-sale property before escrow closes and the purchase is complete. It’s rare, and it’s most often used when the buyer has to move to the new house before they technically own it. This happens when the buyer has kids who are starting school or their old rental agreement ended at an inopportune time. The buyer usually has to pay for rent, utilities, and liability insurance during the rental time frame. This is different from rent-to-own but similar in concept and on a much shorter timescale.
- Sale of Current Home. As mentioned earlier in this article, some real estate purchases are contingent on the buyer selling their current home and using those funds to purchase the new property. Should the sale of the buyer’s home fall through, the seller can then accept the next best offer in the queue.
- Inclusions. Inclusions put a clause into the purchase offer that some aspect of the house remains the same after the sale. Perhaps the buyer likes some of the seller’s furniture or appliances or the furniture used during staging. These items would then enter the purchase offer with a commensurate rise or drop in the purchase price. Some inclusions are even odder: actor George Hamilton asked that the seller (a bakery owner) include fresh-baked cookies in the final deal.
Of course, deal-closing gifts aren’t uncommon, but an inclusion is something more official.
Don’t Get Lost in Real Estate Jargon
Real estate jargon can confuse buyers or even turn them off, perpetually stalling the purchase of their dream home.
Hopefully, we’ve helped pierce some of the mystery around the real estate lexicon and provided sellers and real estate agents with a valuable resource for clients and friends.