Understanding a Contingency Offer and When to Make One
Let’s say you’re ready to buy a new home and at the same time need to sell your old home. When you make the offer on your next dream house, you may need to add a contingency clause. In this case, the clause you add to the contract is that you’ll buy the new home as soon as your old house sells.
A contingency offer is an excellent option for a buyer, who doesn’t want to be saddled with two monthly mortgage payments, but not always for the seller.
What is a contingency offer?
With terms spelled out in the contract, a contingency offer means that the buyer is making an offer on a house with certain conditions that have to be met.
The most common form of contingency offer is one of financing. For first-time homebuyers, you don’t want to offer a contingency contract about how much you can afford, so be sure that your first step in your process is to reach out to your personal lender. For second-time buyers, the contingency is added that purchasing a new home can only happen after their current house has sold.
Because homebuying can be a lengthy process, contingencies are risky for the buyer in a hot market. Many sellers don’t want to wait 30 or 60 days to begin the process of closing on their house. Also, from the seller’s perspective, there is always a chance that the buyer’s financing could fall through.
A buyer has the option to make a non-binding contingent offer. That simply means that the buyer’s offer is good if they sell their house and secure financing. In the meantime, the seller is not obligated to take the house off the market and can entertain other offers.
Types of Contingent Offers
While financing is the most common type of contingent offer, it’s not the only one.
Appraisal Contingency: In a buyer’s market, you might be worried that you’re overpaying for your home. You can set a contingency that the property is valued at a certain amount before you buy the home.
Title Contingency: Let’s say you’ve found a home and want to make an offer before you’ve finished your title research. This guarantees that a buyer can back out of a sale if there are ownership issues or liens on the property.
Inspection Contingency: A home inspection is always recommended before you buy any house, but in some cases, you’ll want this contingency written into the contract. Pay close attention to the conditions of sale because some homeowners prefer to sell their house “as is” and won’t accept an inspection contingency because they don’t want to concede to repairs.
Kick-Out Clause: This protects the seller, who can add a kick-out clause if you send a contract with contingencies. The kick-out clause allows a seller to back out of a contract if a better (non-contingent) offer comes along.
Insurance Contingency: If you’re purchasing a home in a hurricane zone, an area prone to flooding or one that frequently has earthquakes, you’ll want to ensure that you can have the home insured before it’s purchased. You don’t want a “no coverage” surprise from an insurance carrier after you’ve bought your dream house.
Why a Seller Might Accept a Contingent Offer
Some sellers know they have hard-to-move homes, so a contingency offer is a good deal. Maybe the house needs upgrades. Perhaps it’s in a tough-to-sell neighborhood. Or maybe the seller has placed a very high price on the house, and they’ve found a buyer that is willing to consider their “dream” price.
There are ways for sellers to accept contingent financial offers that minimize the risk. Primarily, the seller will vet the likelihood that the deal will go through. How does that happen? They check to make sure the buyer is pre-approved for a mortgage and whether the pre-approval covers the bid they are making.
However, hinging all the financing on the sale of the buyer’s house is not a good position for the seller. There are too many variables that could sink the deal — one being that they have no idea how long it could take for the buyer to sell their house.
The one advantage for the seller agreeing to a contingent offer is that they can more or less take the house off the market while the financing is completed. If the seller believes the buyer is a safe bet to receive the financing for the home, it takes the hassle of marketing the house off their mind.
Try to Make a Non-Contingent Offer
The reality of house hunting is that few buyers can afford to pay cash for a new house or afford to pay on two mortgage loans. That said, talk to your lender or real estate agent about making an offer without contingencies or with as few contingencies as possible. Most sellers are eager to sell their homes and move on.
Consider this scenario: you’ve put a contingency in your offer that you will purchase the home as soon as you sell yours. You might quickly find a buyer for your house, who also adds a contingency that they have to sell their home. In this cycle, the seller of the home you want to buy then has to wait for two other houses to sell before they can move on.
A buyer is better positioned to make a competitive bid if they don’t have to make a contingent offer that hinges on financing. This might mean they’d have to pay for two mortgages until they sell their house if the timing isn’t right. If all else is equal, it’s always better for the seller to accept a non-contingent offer for their house.
Always start your journey with a consultation with your personal loan officer, who can help you understand your options when it comes to financing your new home.