In real estate, contingencies are contractual commitments that need to occur in order for the sale to move forward. Typically, after an offer has been accepted, the seller's agent will list the property as "active contingent." An active contingent status -- sometimes also called "active under contract" -- means that, though an offer has been accepted, certain contingencies need to be met in order for the sale to go through.
If those contract contingencies are not properly satisfied, however, it's possible for the property to go back on the market. In the event that the offer does fall through, the seller's agent would once again list the property as an active listing and the seller would be able to begin soliciting new offers.
Types of contingencies
Now that you have a better idea of what it means when a property is listed as contingent, it's important to get a clearer picture of what contingencies can be part of a real estate transaction. To that end, we've laid out some of the most common contingencies you might find in a real estate contract below. This will give a better idea of what to expect when it's time to negotiate your own contract.
The financing contingency is one of the most common contingencies in real estate. This contingency states that the buyer has to be able to secure financing -- also known as a mortgage -- in order to buy the home. It protects the buyer from being contractually obligated to buy the home if, for whatever reason, they are turned down for their loan.
Usually, the financing contingency and the appraisal contingency go hand in hand. Typically, lenders require a satisfactory appraisal in order for them to approve the buyer for a loan. As you might know, an appraisal involves having a trained, third-party individual determine the fair market value of the property. With that in mind, this contingency is put in place to ensure that neither the buyer nor the lender pays too much for the property.
Then there's the inspection contingency. The inspection contingency says the buyer and the seller must reach satisfactory negotiations on the inspections in order for the sale of the home to move forward. In the event that an agreement regarding repairs cannot be reached, this contingency gives the buyer the right to walk away from purchasing the property.
If, for example, you put an offer in on an investment property and find out after inspection that it needs a lot of work, the inspection contingency allows you to walk away from buying the home with your earnest money deposit in hand.
Home sale contingency
Finally, there's the home sale contingency. As the name suggests, the home sale contingency is used when the buyers need to sell their current home in order to afford a new one. This contingency allows the buyers a certain amount of time to find a buyer who will purchase their old property before the sale on their new property moves forward. After the deadline has passed, if the buyers cannot find a buyer for their home, they have the option to walk away from buying the property.
As you might imagine, home sale contingencies aren't used very often these days. Sellers generally prefer not to accept an offer with this contingency because it doesn't give them much reassurance that the buyer will actually be able to purchase their home. Whenever possible, most real estate agents advise buyers to leave this contingency out of their offers because it often weakens the offer from the seller's perspective.