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Beyond the sale price, there are a ton of details that go into a real estate contract, from concessions to contingencies. Here’s everything you need to know about contingent offers, whether you’re buying or selling a home.
So what’s a contingent offer?
If a home buyer makes a contingent offer, that means their offer to purchase the house is only valid if certain conditions are met. A contingent offer allows buyers to back out of the purchase contract without losing their earnest money deposit if something goes wrong.
Buying a home is typically the largest purchase someone will ever make, and contingencies help buyers ensure that their investment is safe and sound. However, if you’re a buyer in a competitive market, a contingent offer could hold you back. That’s because sellers may be reluctant to accept a contingent offer since there’s a chance that the sale will fall through.
The most common types of contingent offers
A contingent offer may include a few different kinds of contingencies. The ones you’ll see most often in a purchase contract are financing, home sale, inspection, and appraisal contingent offers. Let’s go through the ins and outs of each one:
Also known as a loan contingency, a financing contingency is the most common contingent offer you’ll see. If the buyer has trouble getting a mortgage for their home purchase, this clause allows them to drop out of the contract without penalty. That way, buyers can avoid getting too deep into a real estate transaction without having the money to back it up.
Tip: If you’re a seller looking to avoid a risky financing contingent offer, consider working with Orchard. We’ll give you a market-price cash offer on your home, so there’s no chance of the sale falling through due to financing issues.
This contingency gives buyers the right to have a home inspection done by a professional before completing the sale. The goal of the home inspection is to identify any issues that could cause trouble for the potential buyer.
If the home inspector finds any issues, the buyer could request that the seller pays for the repairs or makes them before closing. If it turns out that there is severe damage to the house, a buyer with an inspection contingency can cancel the purchase contract altogether.
Home sale contingency
A home sale contingency means that the offer is dependent on the sale of the buyer’s current home. This condition helps homeowners avoid the burden of making payments for both their new and existing home at the same time. It also simplifies the buyer’s financial obligations, so they can maximize their chances of getting approved for a new mortgage.
To make a home sale contingent offer less risky, the seller may request the addition of a “kick-out clause.” This clause gives them the ability to continue marketing their property. If the seller receives a better offer, they first must notify the original buyer. If the buyer does not remove the contingency and close within a specific timeframe (usually 72 hours), the seller can go ahead and accept the better offer.
Tip: For current homeowners looking to buy their next house, Orchard’s Move First service guarantees your home sale. With this certainty, you can make a competitive offer on your new house without a home sale contingency.
If the buyer is getting a mortgage to finance their home purchase, their lender will typically require an appraisal of the property. If the appraised value of the house comes back significantly lower than the sale price, the buyer may have trouble securing a mortgage that’s large enough to buy the house. That’s because the buyer’s mortgage lender will not lend more than the house is worth, regardless of the purchase price.
If the buyer doesn’t have additional cash on hand to cover the difference, the buyer and seller can negotiate the purchase price to match the appraised value. If this doesn’t work out, an appraisal contingency will allow the buyer to break the purchase agreement without forfeiting their deposit.