Explaining the meaning of contingency
What does conditional mean in a real estate sale?
There are more sale statuses online than you might expect, especially if you're a first-time buyer. Some of these sale statuses are familiar to everyone, such as “For Sale” and “Sold.”
You may have seen other common statuses like “pending” or “conditional” when searching for properties online, but these sales statuses, like the statuses you know, indicate where the property is in the sales process.
It’s important to understand what they mean in order to identify properties you can buy.
Today, we want to focus solely on what it means when a property is marked “Conditional” to give you a better understanding of the upcoming real estate market. By the time you finish reading, you will have a firm understanding of the definition of conditional in real estate and how it differs from a “pending” status.
Buyers and sellers ask what “contingent” means all the time, and by the time you're done reading, you'll have a firm understanding of this status in home sales.
There is a subtle difference between pending and conditional that every buyer and seller needs to understand.
What does contingency mean in a real estate sale?
A conditional status on a property means that the homeowner has accepted an offer from a buyer that is subject to some conditions. A condition is a condition that must be met by either the buyer or seller in order for the sale to go through as planned. This can be any kind of condition that is deemed appropriate, set up to protect both parties.
For example, a buyer may make an offer to purchase a home, but the offer is still contingent on them first selling their current home before the property can be considered fully “sold.”
This is just one of many reasons why a property may be marked as conditional and ultimately not go through.
What are some of the most common contingencies in real estate contracts?
When buying or selling a home, there are some typical real estate contingencies you should be aware of. These contingencies are considered usual or common. Some of them are listed below:
Home inspection contingency – A set period of time (usually 7-10 days) allows the buyer to inspect the property for structural, mechanical, or other safety issues. If any significant issues are found during the home inspection, the buyer can back out of the purchase contract with proper notice. A home inspection is a big hurdle to clear, which is why real estate agents place such an emphasis on preparing for a home inspection. Home inspections are the number one reason home sales don’t last. Mortgage contingency clause – Most buyers can’t afford to buy a home with cash. They need to get financing from a lender. A mortgage contingency gives the buyer a specified period of time to get a loan for a certain amount. If the buyer can’t get financing, this clause allows them to back out of the purchase contract without losing their earnest money, provided they give proper notice by the specified contingency date. Home sale contingency – As mentioned above, buyers may ask for a clause that says the home must be sold by a specified date in order for the buyer to proceed with the purchase. Home sale contingencies are rare and often unacceptable in seller-favored real estate markets. Other Conditions – Real estate contracts can contain any number of unspecified conditions that one party must meet in order for the deal to go through.
What to expect from a home listed as conditional
As mentioned above, there are many different conditions that come with real estate, each of which comes with different obligations and requirements that must be met before the property can officially be sold.
The most common contingencies expected when a property is labeled as such usually relate to the mortgage approval process that the buyer goes through, which the buyer may not be successful in.
This can happen if a buyer lies about their assets or total income, but with interest rates so low, most people can find a way to qualify for a property. However, as the market turns and interest rates start to rise, we see many more cases of conditional contracts falling apart because of this.
If the home is marked as conditional, other offers may also be accepted as back-up offers as a way for the seller to increase their chances of selling the property.
More on this in the next few paragraphs.
Can I make an offer on a house that is conditional?
Can I make an offer on a house that is conditional?
Yes, a buyer can make a contingent offer on a home, but a seller cannot unilaterally accept a second offer unless the first agreed upon sale has closed. Real estate contracts are legal and binding.
What about a backup offer?
Almost all contingent listings allow other buyers to make offers on the property, because the contingent deal is technically still active in the market and can fall through at any time (as mentioned above). The seller will accept other offers so that they can secure a buyer for the property regardless of whether the current buyer's contingent terms work out. However, the buyer with the back-up offer cannot move forward unless the first buyer's contract is terminated.
For example, a contingent contract may be contingent on the buyer selling their property first. If all goes well with the first buyer and the buyer is able to sell their home and purchase the new property from the seller, the property's contingent status will change from contingent to pending. All will go according to plan.
However, if the first sale doesn't go through, the second buyer will move forward.
What is a kick-out clause?
A kick-out clause is another name for a right of first refusal. When there is a right of first refusal, the buyer usually cannot proceed with the purchase at this time. Usually, the reason is that the current home would need to be sold.
With a right of first refusal, you can still purchase the home if another buyer expresses interest. As the first buyer, you have the first chance to decide whether or not to proceed with the purchase.
A right of first refusal or kick-out clause usually gives the buyer 24 to 48 hours to make a decision.
The first buyer also has the opportunity to back out of the condition and purchase the home instead, even if their current home hasn't sold yet. If the first buyer can't do this, the home seller can contact the second buyer instead and proceed with them.
So, if you find a property with conditions that you like, contact a real estate agent to make an offer on the property. If the seller likes your offer, they will either force the current buyer to move forward without conditions or vacate the property so that you can buy it instead.
What is the difference between conditional and pending?
In both Pending and Conditional statuses, the seller is accepting offers from buyers. In many states, you have the choice to label your home as Pending or Conditional on the MLS. Many agents mark their home as Pending even if the conditions are not resolved. In fact, I am one of them. If you are selling a home, there is a reason for this and you need to understand it. When you mark a home as Under Contract, it stops accruing days on market on the MLS. When you mark a home as Conditional, it continues accruing days on market.
So if the sale doesn't go through at a later date, it will appear that the home has been on the market longer than it actually was. This can be a disadvantage for sellers, as days on the market affect how buyers view a property. In a hot sellers' market, a home that has been on the market a long time will look less attractive to buyers.
Final thoughts on the meaning of contingency
Understanding the meaning of a conditional is important for both buyers and sellers because it can affect decision-making. After reading this article, we hope you have a firm understanding of the definition of a conditional in real estate sales.
About the Author: The above article “What does conditional status mean in real estate?” was written by Bill Gassett. Bill has worked in the real estate industry for the past 33 years. He is employed by RE/MAX Executive Realty in Hopkinton, Massachusetts. Bill is passionate about providing reliable information to help buyers, sellers, and fellow real estate agents make the best decisions possible. His writing has been featured in RIS Media, National Association of Realtors, Inman News, Placer, Today.com, Credit Sesame, and more.
About Rochester Real Estate Blog: Rochester Real Estate Blog is owned and operated by Kyle Hiscock of the Hiscock Sold Team at RE/MAX Realty Group. With over 40 years of combined experience, we are happy to share our knowledge and expertise with you if you are looking to sell or buy.
We service the following areas in the Rochester, NY metropolitan area: Irondequoit, Webster, Penfield, Pittsford, Fairport, Brighton, Greece, Gates, Hilton, Brockport, Mendon, Henrietta, Perinton, Churchville, Scottsville, East Rochester, Rush, Honeyoye Falls, Chili, and Victor NY.