One of the happiest moments for every home seller is getting a great offer from a prospective buyer. However, every experienced real estate agent knows that a contingency offer is not a complete deal.
The buyer's lender may decline the loan, or the buyers' inspection report could reveal problems in your house which you didn't know about. You can lose your earnest money deposit and have to start over from scratch with another buyer. What if there was a way for home sellers to avoid getting caught up in these situations? Luckily, there is.
How often do contingency offers fall through? In our experience, it happens more than you think. This guide explains how often contingencies fall through and how to maximize the chances of closing on time.
What Does Contingency Mean in Real Estate?
A contingency is a condition that must be met for a deal to become official. If the buyer's contingencies have not been fulfilled by the time of closing, then they can back out of the deal. Sometimes this happens when there is a problem with the lender or inspection report. This results from your home not meeting certain specifications or criteria required by lending institutions or inspectors.
A contingency offer is an "insurance policy" for buyers who cannot buy without getting contingencies checked off first. For example, if you're purchasing a new house with financing, but the lender requires an inspection, the buyer will have to ask for a contingency. They need it to get out of paying for the home if it turns out that there are structural problems with the house.
If you're selling your property at the same time that your home is being bought, then contingencies work slightly differently. And this is where many sellers start to get nervous. For example, a buyer might ask for a contingency that allows them to back out of the deal if they cannot sell their current home before buying the new home.
Why Contingency Offers Matter?
Contingencies are essential because they act as safety measures for both buyers and sellers. If you're selling, then having an active contingent offer in the contract allows you to know ahead of time about any issues with your home so that you can take care of them before closing. If you're buying, then contingency offers to allow you to make a big purchase without breaking the bank or making unwise decisions.
The Percentage of Contingency Offers that Fall Through
Although home ownership is at an all-time high, it seems as though the home selling process has gotten more complicated with time. For this reason, most buyers will request contingencies to be included in their offer. The percentage of the contingent house offers that fall through can vary greatly depending on several factors. The most common include market fluctuations and property type.
For buyers with financing in place, almost 100% of contingencies are fulfilled. The majority of contingency offers from the perspective of the buyer will be contingent upon loan approval. Therefore, it's critical to get your home adequately pre-inspected before accepting a contract. When you do this, you'll know which items can be fixed and which items cannot.
As mentioned previously, not all contingencies are contingent upon financing (or inspections.) Some buyers might want contracts with contingency offers that entail an inspection of the property or sale of their current home. For homes in good condition, the percentage of contingencies that fall through is about 50% for this type of offer.
For homes in fair condition, the percentage of contingencies that fall through is about 75%. For homes in poor condition, the percentage of contingencies that fall through is roughly 90%.
Why Do Contingencies Fall Through?
There are many reasons why contingencies fall through. Here are some of those reasons.
Sometimes, buyers are unable to secure their financing. This is also the reason why many homes languish on the market for months without any movement. A buyer might make an offer with the hope of securing a mortgage, only for the deal to fall through when the loan gets rejected.
A buyer might have a change of heart due to a job transfer or relocation. It can be pretty hard to relocate on short notice, so this is not always the buyer's fault. They simply might not have had enough time to secure new housing at their new location, so they'll have to pull out of the deal.
Trouble with Lenders
When a buyer needs an appraisal or inspection contingency, they typically have to get written approval from their lender before putting in an offer. If this isn't done, then the contingency might not be fulfilled.
Timing Is Not Right
As with all things in life, timing is everything. If you're selling your home at the same time that another buyer is purchasing a home, there's a good chance that one of those deals will fall through unless both buyers are flexible. It would be nearly impossible to sell your home and buy another one simultaneously.
Some buyers may experience trouble putting aside huge finances to buy a home. Some people also buy houses and then decide that it's not what they want after all. Closing a sale with such buyers is not easy.
How to Avoid Contingency Risks
While it's not in your hands to control the real estate market movements, you can always avoid contingency offers. If you can't prevent contingencies, you can try to negotiate. Here are some of the ways to avoid contingencies:
Sell to Cash Buyers
If you want to avoid contingency risks as a seller, then try selling your home to cash buyers. Cash buyers can close quickly without having to worry about intricate lender processes or the sale of their current home.
Consider a Kick-Out Clause
If you're a seller and you don't want to sell your property as-is real estate deal, consider asking for a kick-out clause. Kick-out clauses allow buyers to back out of the agreement if they run into any issues with financing or inspections. A kick-out clause also allows you to back out of the offer if another buyer offers a better deal.
If you're a buyer, then getting pre-approved for your offer gives you more leverage in negotiations. Sellers see that buyers are serious about their purchase and willing to make the necessary arrangements to seal the deal. But you must know that there's a difference between getting pre-approved and prequalified.
How We Can Help
Contingencies are there in real estate contracts to protect all parties involved. They are the best way for buyers to assess a house, get proper financing or investigate temporary living conditions. However, they can also lead to additional complications if not done right.
To avoid potential risks with contingency offers, you should consider working with a real estate agent who knows how these clauses work. Our team at SimpleShowing is here to help you get the best contingency deals and sell your house faster. Contact us to get started today.