keeping real estate simple

A contingent contract is something that is useful in both a seller’s and buyer’s market. So it is important to know what it is, how it works, and how to use it to your advantage.

In a nutshell, a contingent contract means that something has to happen before the transaction can be closed. For the contingent buyer, they have their own house to sell. And that must be done for their lender to give them the money for the other house. For the contingent seller, it means they have to find a house before they will sell their house. Think of it like dominoes, one has to fall before the next one can.

Basically, a contingency is there to protect one side of the contract.

There are several types of contingencies, as there can be a contingency written up for almost any situation. So we cannot possibly talk about every type that can come up. However, we will discuss the two main ones you will run into in real estate.

Buyer Contingency

For the buyer’s out there, the “contingent” houses are the hidden jewels of the market. Why do I say that? Because somebody has already deemed it to be a great house at a great price…because a buyer made an offer and are trying to buy the house. And, it is hidden because most buyers do not include them in their home searches because they are not a default option in the searches. The buyer has to take an extra step to include them and so they disappear from most buyers’ searches.

But they shouldn’t disappear from yours, especially if you are a buyer who doesn’t have a house to sell. Here is why. As a non-contingent buyer, your offer is already stronger than the current one the seller has in hand. And that is before any financial terms are discussed. Because you are not waiting on a house to sell, you are ready to go. If you can match the financial terms, you are in a great position to get the house.

Those contingency contracts have in them what is called a “kick-out” clause. And it does exactly what the name implies. The seller can “kick-out” the contingent offer for a non-contingent offer. So when your offer comes in, the contingent buyers will have 48 hours to drop their contingency and proceed with the contract, or they will lose the house to you. Thing is, most with a contingency cannot get financing without the sale of their house. So they are out of luck and you slide in as the new buyer. Pretty sweet.

But you may be thinking, “I will have a house to sell too, so this doesn’t apply to me.” Not true. It still could apply. You do NOT have to be non-contingent contract to knock out a contingent one. Say what?  Yep, it’s the truth. If you have a house to sell, but it is on the market and already has a contract, guess what? Yours is still a stronger offer than the other one assuming they do not have a contract. And the seller could invoke the kick-out clause in favor of you. So don’t give up just because you have a house to sell.

So, as a buyer, make sure you include these in your searches. Most real estate websites have a way to do this. If you cannot figure it out, ask your Realtor to set you up on a contingent search. It is a great way to find a house in a hot market.

Seller Contingency

This is basically the same thing as a buyer’s contingency, but in reverse. This is used in a market where houses are selling very fast and a potential seller doesn’t want to end up homeless, or having to move into a temporary residence if they cannot find a house in a certain period of time.

In most cases, you will need to at the very least have your home on the market in order to make a contingency offer on another house for the seller to accept it. So, for sellers it can be a catch-22. They don’t want to put their house on the market and have it sell too soon, but cannot seriously look at houses without theirs being on the market. The contingency allows both to happen.

While that contingency can give the seller the warm and fuzzies, it doesn’t come without its downfalls. For one, buyers will take this into consideration when deciding whether to make an offer or not. Some buyers don’t want to be tied up in a contract that may never come to fruition and miss out on another house because they are waiting on the seller to find a house. For all they know, you may be the pickiest buyer ever, and pass up several great homes looking for the perfect one that may never come along.

Also, some buyers may not feel like they would need to honor the contract they made with you if something else comes along and back out of the contract. Now your house has been on the market a while and you might have missed out on a bunch of other buyers. So be careful when considering this option as it might backfire on you.

Overall, the use of contingency contracts can be a sound decision for virtually any type of market cycle an area can see. There will always be a purpose for them. However, one needs to be sure they understand what they are getting themselves into when it comes to signing one. Consulting with a knowledgeable real estate professional will help you know when to use it, and when not to.