According to Rocket Mortgage, in early 2024, only 5% of home sales contracts were terminated? It shows the importance of understanding the implications of making a contingent offer on a home. For sellers, offers like these can introduce uncertainties into the transaction.
Join us, as we look into what sellers need to know about these offers, the potential risks and benefits, and strategies to ensure a successful sale.
What Is a Contingent Offer?
A contingent offer is an offer to purchase a home that includes conditions the buyer must meet before the sale can move forward. These conditions protect the buyer but can create uncertainty for the seller.
Some contingencies are standard in real estate, while others depend on the buyer’s specific situation. Sellers should understand how these offers work and what risks they bring.
There are three main reasons why a buyer may submit a contingent offer in the home buying process:
- They need to sell their current home before purchasing another
- They need financing approval before committing to the purchase
- They want to confirm the home’s condition through inspections and appraisals
Selling a Current Home
One of the most common reasons for a contingent offer is that the buyer needs to sell their existing home first. It’s called a home sale contingency. The purchase can’t move forward unless their current home sells by a specific deadline.
If it doesn’t, the buyer can back out without penalty. It can slow down the process for a seller, leaving them in a holding pattern while waiting for the buyer’s sale to go through.
Securing Financing
A financing contingency allows a buyer to withdraw if they can’t secure a mortgage. Even if they have pre-approval, final approval depends on factors like credit checks, employment verification, and lender requirements. Sellers should be aware that mortgage approvals can fall through, especially if interest rates change or the buyer’s financial situation shifts.
Home Inspections and Appraisals
Buyers often include inspection and appraisal contingencies to make sure they aren’t overpaying or purchasing a home with hidden problems. A failed inspection can lead to renegotiations, repair requests, or the buyer walking away.
An appraisal contingency protects buyers from paying more than a lender believes the home is worth. If the home appraises for less than the offer price, the deal could fall apart unless the buyer covers the difference or the seller lowers the price.
Types of Home Sale Contingencies Sellers Should Expect
Sellers should be aware that not all home sale contingencies are the same. Some protect buyers more than others, and each comes with different risks. Understanding these contingencies can help sellers make informed decisions when reviewing an offer.
There are three main types of home sale contingencies that sellers should expect:
- Home sale contingency
- Financing contingency
- Inspection and appraisal contingency
Home Sale Contingency
A home sale contingency means that the buyer’s purchase depends on selling their current property. If their home does not sell within the agreed timeframe, they can walk away without penalty.
It can create a long waiting period for sellers, leaving their property off the market while the buyer tries to secure their sale. Some home sale contingencies include a clause that allows the seller to accept other offers if a stronger buyer comes along. Without this, the seller may be stuck waiting with no guarantee that the sale will go through.
Financing Contingency
A financing contingency allows a buyer to cancel the purchase if they cannot secure a mortgage. Even with pre-approval, loan approval is not guaranteed. Lenders may deny funding based on changes in the buyer’s income, credit score, or debt.
If this happens, the deal can fall apart at the last minute. Sellers may prefer offers from buyers with strong financial backing or those who can provide a larger earnest money deposit as a sign of commitment.
Inspection and Appraisal Contingency
Buyers often include an inspection contingency to make sure the home does not have major structural or safety issues. If an inspection reveals serious problems, the buyer may request repairs or a price reduction.
If an agreement is not reached, they can walk away. An appraisal contingency protects buyers if the home is valued lower than the agreed purchase price.
If the appraisal comes in low, the lender may not approve the full loan amount. The buyer may need to pay the difference, renegotiate, or cancel the contract.
How to Protect Your Sale When Accepting a Contingent Offer
Accepting a contingent offer can create uncertainty for sellers, but there are ways to reduce the risks. Sellers can use specific strategies to keep their sale moving while allowing buyers time to meet their conditions. The right approach can prevent long delays and lower the chance of a deal falling through.
There are four main ways sellers can protect their sale when accepting a contingent offer:
- Use a kick-out clause to keep options open
- Set a clear deadline for the buyer’s contingency
- Require proof that the buyer is making progress
- Negotiate stronger contract terms
Use a Kick-Out Clause to Keep Options Open
A kick-out clause allows the seller to continue marketing the home while the buyer works through their contingencies. If another buyer makes an offer, the seller can give the original buyer a set period, usually 24 to 72 hours, to remove their contingency or step aside.
It prevents the home from being tied up for weeks with no guarantee of closing. Without this clause, the seller may lose out on stronger offers while waiting for the buyer’s situation to improve.
Set a Clear Deadline for the Buyer’s Contingency
A firm deadline helps keep the process moving. If a buyer needs to sell their home first, the seller can require that it be listed within a certain number of days.
If a financing contingency is involved, the seller can set a date by which loan approval must be confirmed. It keeps the buyer accountable and gives the seller a way out if progress isn’t being made.
Require Proof That the Buyer Is Making Progress
Sellers should ask for evidence that the buyer is actively working to meet their contingency requirements. If the buyer needs to sell their home first, they should provide proof that it is listed or under contract.
If they are waiting for mortgage approval, a letter from the lender showing progress can help. Without these safeguards, a seller may be left in the dark about whether the deal is moving forward.
Negotiate Stronger Contract Terms
A strong contract protects the seller if the buyer backs out. A higher earnest money deposit can make the buyer think twice before walking away.
Sellers can also negotiate a shorter contingency period to speed up the process. If the buyer is truly serious, they will be willing to meet reasonable conditions to secure the home.
Alternatives to Accepting a Contingent Offer
Sellers are not required to accept a contingent offer. Some may prefer to avoid the uncertainty that comes with waiting for a buyer to meet their conditions. There are ways to move forward with more certainty while still attracting qualified buyers.
A seller who wants a faster and more secure sale may choose to accept offers from buyers who do not need to sell a home first. Buyers who already have financing or cash available can move forward without the delays that come with contingencies.
While contingent buyers may offer more money, the added risk may not be worth it. In a competitive market, sellers can often attract buyers who are ready to close without extra conditions.
Some buyers rely on selling their current home before purchasing another, but there are ways around this. A bridge loan is a short-term loan that helps buyers secure a new home while waiting for their existing one to sell.
Some lenders offer financing programs that allow buyers to move forward without a home sale contingency. If a seller wants to work with a contingent buyer but reduce the risk of delays, suggesting alternative financing options could be helpful.
Working With Cash Buyers or Investors
Cash buyers and investors typically do not require contingencies, making them a good option for sellers looking for a faster sale. While their offers may be lower than those from traditional buyers, they remove much of the uncertainty. Investors looking for rental properties or buyers purchasing with cash often have fewer conditions attached to their offers, allowing sellers to move forward with less risk.
Making a Contingent Offer on a Home
Sellers should carefully consider the risks and benefits of making a contingent offer on a home. While these offers can lead to a successful sale, they may cause delays or uncertainty. Understanding contingencies, setting clear terms, and exploring alternatives can help sellers make informed decisions and keep the process on track.
We started We Buy Houses Memphis to help homeowners sell quickly for cash. We’re local, committed to our community, and make the process easy. No realtor fees, no repairs, just a fast cash offer within 24 hours. If you accept, we’ll close at your convenience.
Get in touch today to find out how we can help with your house sale!
