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What Is a Contingency Offer?

Whether you are a first time home buyer or a seasoned professional, making an offer on a home can be a complicated process. Along with deciding on the price you want to offer for the home, your home offer may also require you to make other important decisions such as whether or not to include contingencies. In order to make this decision, you need to understand what a contingency offer is.

A traditional offer to purchase a home includes the price you are willing to pay for the property, a date of closing and a date of possession, and other terms for a purchase agreement.

Sometimes, making an offer on a home is “contingent”, or dependent, on one or more conditions that must be fulfilled before the buyer is willing to proceed with the purchase. In theory, a contingency offer can include almost any condition; however, there are some common conditions that buyers more commonly include in an offer to purchase, such as:

  • Financing contingency –this is a very common condition included by a buyer when making an offer on a home. If the buyer is depending on financing to complete the purchase, a financing contingency is included in the home offer. Usually, the buyer is required to make a good faith effort to secure financing within a specified period of time. Often, the condition is further contingent on the buyer obtaining financing at, or below, a specified interest rate.
  • Inspection contingency – This makes the purchase conditioned on a satisfactory inspection of the property. Most inspection contingencies allow the buyer to back out if a significant problem is encountered during the inspection. Alternatively, the buyer may request the seller to repair the problem or the buyer may choose to accept the property “as is” if the problems discovered during the inspection are insignificant or not costly.
  • Sale of home (Home Sale) contingency – if the buyer currently owns a home, and cannot afford two mortgages, the buyer may make the offer contingent upon the sale of his or her current home. As with a financing contingency, this condition typically gives the buyer a specified period of time within which to complete the sale of his or her current home.
  • Repairs contingency – a buyer may notice problems with the property prior to receiving an inspection report. In this case, the buyer may condition the purchase on repairing the problems.
  • Appraisal contingency – a lender usually determines the maximum amount available to a borrower based on the current market value of the property that will secure the loan. Because market conditions can change rapidly, a buyer and seller could agree on a sales price that is considerably higher than the actual market value in the eyes of the lender. For this reason, an appraisal contingency may be included in a home offer to allow the buyer a way out if the home appraises for less than the sales price agreed upon by the parties.

As is the case in a traditional offer to purchase, a contingency offer may be accepted as is, rejected in its entirety, or the seller may submit a counter-offer. For example, the seller may accept a financing contingency but wish to allow the buyer less time to secure financing, so on and so forth.

If making an offer on a home is in your future, be sure to consult with your Better Homes and Gardens real estate agent about whether you should make a contingency offer and, if so, what conditions you should include in the home offer.