Imagine this scenario: You're in the market for a new home, and after an extensive search that seems to have lasted for months, you finally come across the perfect property. It has the ideal number of bedrooms, bathrooms, and just the right amount of charm. However, there's one dilemma looming over you – uncertainty regarding the approval of your loan application.
You certainly don't want to risk losing the opportunity to own this house, but at the same time, you don't want to put forth an offer that exceeds your financial means. So, what's the solution? You decide to make a contingent offer. Why? Because a contingent offer serves as a protective measure when you submit an offer on a house. But how does a contingent offer work exactly?
What is a Contingent Offer?
A contingent offer on a house is an offer made by the buyer, which includes a protective clause. This clause essentially states that if certain conditions specified in the offer are not met, the buyer has the right to withdraw from the purchase without any penalties.
The purpose of this practice is to safeguard the buyer from a few potential issues. First, it protects them from losing their earnest money, which is the deposit made to demonstrate their commitment to buying the property. Secondarily, it prevents them from becoming involved in a deal that they cannot afford or manage financially. Lastly, it helps address any unforeseen problems that may arise during the course of the transaction.
Upon receiving a contingent offer, the seller has the choice to accept it, reject it, or make a counteroffer. The ultimate objective is to arrive at an agreement that is mutually beneficial for both the buyer and the seller.
When making a contingent offer, the buyer has the flexibility to determine which contingencies or specific terms they wish to include in the offer. Seeking the assistance of a real estate professional, such as a lawyer or realtor, can be highly advantageous in designing and executing the offer with the appropriate contingencies. An experienced real estate professional is likely to possess a deeper understanding of the housing market, unless, of course, you happen to be both the buyer and a real estate professional.
It's worth noting that a contingent offer can encompass zero, one, or multiple contingencies, but whether the seller agrees to them is a separate matter.
Now, let's delve into some common types of contingent offers.
What Are the Different Types of Contingent Offers in Real Estate?
Appraisal Contingency
The listed value of a home can sometimes differ from its appraised value. The appraised value represents the actual worth of the property, taking into account factors such as its location, square footage, functionality, and other relevant aspects. To determine the appraised value, a qualified home appraiser evaluates the property before the closing process. If the appraiser determines that the value is significantly lower than the price set by the seller, the buyer has the option to either withdraw from the purchase or negotiate a lower price, utilizing the appraisal contingency as leverage.
Mortgage Contingency
When purchasing a home with a mortgage, it is important to obtain prequalification for a loan. Prequalification involves a lender assessing your eligibility for a mortgage and determining that you meet the necessary criteria to qualify for a specific loan amount. However, it's crucial to note that if there are changes to your documented financial information between the prequalification stage and final loan approval, there is a risk that your loan may not be approved, potentially affecting your ability to proceed with the purchase.
In such a scenario, it is essential to promptly notify the seller about the change within a specified timeframe to exercise your right to withdraw from the purchase and receive a refund of your earnest money. Failure to inform the seller about your inability to secure proper financing could leave you liable to fulfill the purchase agreement even without the necessary financial means.
Inspection Contingency
A home inspection involves a thorough assessment conducted by a licensed professional who carefully examines both the interior and exterior of a house. Its purpose is to reveal any potential issues or problems that the buyer may encounter if they proceed with the purchase.
Typically, it is the buyer who covers the cost of the home inspection. If during the inspection process the buyer uncovers a significant issue that becomes a deal breaker, they have the option to walk away from the purchase. It is advisable to schedule the inspection promptly after making a contingent offer so that the buyer can swiftly assess the findings and make an informed decision regarding whether to proceed with the purchase or allow the seller to relist the home on the market.
Home Sale Contingency
Among the contingencies listed, a home sale contingency stands out as the riskiest and least frequently utilized. It specifies that a buyer is not obligated to proceed with the purchase if they are unable to sell their current home. Sellers are generally hesitant to accept this contingency since their own home sale relies on someone else successfully selling their property.
Title Contingency
A title contingency serves as a safeguard for the buyer against potential risks posed by a deceitful seller or a seller who has neglected to resolve any outstanding property liens. This contingency stipulates that prior to finalizing the purchase, all liens or title-related concerns must be addressed and resolved. Its purpose is to ensure that the buyer can proceed with the transaction with confidence, free from any legal or financial encumbrances associated with the property's title.
What Happens After the Home Seller Accepts a Contingent Offer?
Once the seller agrees to a contingent offer from the buyer, they have the option to remove their house from the market and proceed with the hopes of a smooth transaction. However, if the seller wishes to maintain flexibility and explore other opportunities, they can incorporate a "kick out clause" into the agreement, which allows them to continue marketing the property to potential buyers.
If another offer is received while the contingent buyer is still in the picture, the seller must provide the contingent buyer with a specific timeframe to proceed with the purchase. If the buyer successfully meets the deadline, they secure the home. However, if the contingent buyer fails to meet the specified requirements within the designated window, the seller can exercise their right to "kick out" the buyer and pursue an alternative course of action.
King & Edge Real Estate in Boise, Idaho
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