When delving into real estate transactions, you might come across two terms that often cause confusion: "contingent" and "under agreement." Both terms refer to stages in the home buying process, but they represent distinct phases with unique implications. Let's explore the differences between the two, ensuring you're well-informed throughout your real estate journey.
Understanding these terms is crucial, as they can impact your rights, obligations, and timeline as a buyer or seller. So, let's dive right in and demystify these real estate stages.
Contingent Offer
A contingent offer is a proposal made by a buyer to purchase a property, subject to certain conditions being met. These conditions, or contingencies, are designed to protect the buyer's interests and provide a way out of the contract if specific criteria aren't satisfied.
Contingencies can cover various aspects, such as home inspections, appraisal reports, or even the sale of the buyer's current home. If any of these conditions aren't met, the buyer can walk away from the deal without facing penalties.
Home Inspection Contingency
One of the most common contingencies is the home inspection clause. This allows the buyer to hire a professional inspector to assess the property's condition. If the inspector finds significant issues, the buyer can negotiate repairs, request a lower price, or even cancel the contract.
For instance, if the inspector discovers a faulty roof, the buyer might ask the seller to cover the repair costs or reduce the asking price to reflect the needed work. If the seller refuses and the buyer decides the issue is too costly to fix, they can withdraw their offer without penalty.
Financing Contingency
Another crucial contingency involves financing. In a contingent offer, the buyer includes a clause stating that the sale is contingent upon securing a mortgage. This protects the buyer if they're unable to obtain financing, as they can cancel the contract without facing financial consequences.
For example, if the buyer's lender denies the mortgage application due to a change in the buyer's financial situation, the buyer can back out of the deal without losing their earnest money deposit.
Under Agreement
Once the seller accepts the buyer's contingent offer, the property is considered "under agreement." This stage signifies that both parties have agreed to the terms of the contract, subject to the contingencies being met.
During this period, the property is typically taken off the market, and the seller is obligated to negotiate with the current buyer exclusively. However, the contingencies still need to be satisfied before the deal can move forward to the closing stage.
Removing Contingencies
As the under agreement process progresses, buyers and sellers may work together to remove contingencies. This often involves the buyer and seller negotiating repairs, credits, or price adjustments to satisfy the contingencies and move toward a clean contract.
For instance, if the home inspection reveals minor issues, the buyer and seller might agree on a price reduction or the seller performing the repairs. Once these adjustments are made, the contingencies are removed, and the contract becomes binding.
Failed Contingencies
If, however, the contingencies can't be satisfied, the buyer can exercise their right to walk away from the deal without facing penalties. In this case, the property goes back on the market, and the seller can start negotiating with new buyers.
For example, if the buyer's lender denies the mortgage application due to an unforeseen change in the buyer's credit score, the buyer can cancel the contract. The property will then be listed again, and the seller can continue marketing it to other potential buyers.
In the dynamic world of real estate, understanding the differences between contingent and under agreement stages is vital for both buyers and sellers. By familiarizing yourself with these terms, you'll be better equipped to navigate the home buying process, negotiate effectively, and make informed decisions throughout your real estate journey.