Real estate is notorious for having jargon that can be baffling to anyone outside the industry. One very common topic that comes up when buying or selling homes is real estate contingencies. These important provisions of a contract provide terms that can be crucial to protecting the interests of both the buyers and the sellers. This article will explain not only what they are, but also will detail common real estate contingencies, how they are used, and important strategic considerations related to them. Although focused on California real estate, much of the content here will be relevant to buyers and sellers throughout the country.
Before diving into the fascinating world of real estate contingencies, I should clarify I am real estate agent and NOT an attorney. None of the following information should be construed as legal advice (I am not qualified nor allowed to provide legal advice – that is the role of your attorney). Please consult with a qualified legal professional in your local market before relying on anything you might read here (or anywhere else online). With that out of the way, let’s talk contingencies!
What Are Real Estate Contingencies?
Contingencies are typically conditions that have to be satisfied for either the buyer or seller, in order for a contract to proceed toward closing. Most commonly, contingencies are escape clauses for a buyer. If some aspect of the property that is covered by a contingency fails to be satisfied, then the party favored by the contingency has an option to cancel the purchase. Real estate contingencies sometimes cover conditions and other times cover events that may or may not happen. One more tangible way to understand what define real estate contingencies is to look at who they benefit and some real world examples.
Seller Contingencies vs. Buyer Contingencies
In California, and throughout much of the US, real estate paperwork has a bias towards protecting buyers. There is good reason for that, as historically buyers have been most at risk in real estate transactions. This bias is evident when it comes to the number of contingencies buyers and sellers might have in a typical sale.
Sellers in California rarely have any contingencies. There are certainly contractual terms that enable sellers to pursue cancellation, but those are usually only available when a buyer is failing to perform their contractual obligations, (and only then with proper written notice). In more simple terms, there are very few ways for a seller to cancel a sale once acceptance has been reached, assuming the buyer is living up to their agreement. The most notable exception to this is when a seller has negotiated a contingency for the purchase of their next home.
Seller’s Purchase of Replacement Property
Occasionally a seller will sell with one important contingency pertaining to their purchasing a replacement home. In California, the contingency form that details this is called the Seller’s Purchase of Replacement Property (or SPRP). This means the sale is contingent upon them securing a replacement property. This contingency is somewhat rare, and it can deter some buyers and potentially depress sales price. Usually sellers cannot cancel a sale once a buyer has an acceptance, however with this contingency in place they potentially can cancel.
With this type of seller contingency in place, a buyer could be paying for inspections, trying to plan a move, etc. all with the knowledge that the seller can cancel the deal if they don’t find a home they like. There are various terms related to this real estate contingency. In some cases the contingency provides that the seller must identify and then get into escrow on their replacement home. In other cases, it stipulates the seller must actually close escrow on their replacement property. There are also options which determine whether timelines for the buyer begin upon acceptance, or only after the seller has removed their contingency for their replacement property.
Overall, most buyers aren’t thrilled with this contingency. It introduces several risks to the buyer that simply are not present in a more typical purchase where the seller has no contingencies. This seller contingency is actually more practical in a buyer’s market where the buyer knows there’s a stronger chance the seller will be able to secure a replacement property quickly (due to higher inventory, more motivated sellers, etc). However, it can also be an appealing option to sellers in a low inventory seller’s market since they may not want to sell unless they are assured they can find a replacement home to move into.
The relative risk to the buyer also depends heavily on whether or not the seller has already identified their replacement property, and if so, how far along they might be in their escrow. If the seller is already well into escrow on their replacement, this contingency can pose less risk to the buyer than if the seller has not identified their replacement home yet.
Contingency for the Sale of Buyer’s Home
The most common real estate contingency form in California, aside from the contingencies covered in the Residential Purchase Agreement, is the Contingency For Sale of Buyer’s Property (or COP). With this buyer contingency, a buyer is submitting an offer to a seller and basically telling the seller they are only willing to purchase after the sale of their existing home. This usually means the buyer needs the proceeds from the sale of their existing home to complete their purchase.
This buyer contingency is more or less common depending on market conditions. In a buyer’s market, sellers can be more receptive to offers that have this contingency. The main caveat in that scenario is that the seller needs to have confidence in the buyer’s ability to sell their existing home. In seller’s markets, getting a seller to consider what is commonly referred to as a “contingent offer”, can be more challenging. The seller has less incentive to risk the uncertainty of another sale tied to their own.
This buyer contingency has become a non-starter in all but rare circumstances in the hyper-competitive market conditions existing in San Diego at the time this article was written (December, 2021). In this market, a seller will likely be looking at multiple offers shortly after listing. Not only will likely all of those offers be not contingent on a sale of a buyer’s property, most or all will be removing some of the more typical contingencies (eg. removing appraisal contingency, shortening inspection contingency, etc). I will cover more on those common contingencies below. Most sellers would not want to engage with a buyer that has to complete the sale of their existing home (which may or may not be on the market yet). Sellers would rather accept an offer from a cash buyer or financed buyer that is ready to move forward with their purchase immediately.
In the current San Diego market, sometimes sellers are looking at 6-12+ offers, many of which are doing everything they can to appeal to the seller. In those scenarios a contingent offer (a contingency for the sale of the buyer’s home), just does not have a chance. And, even when there are not multiple offers, most sellers know they can sell to a non-contingent buyer in a relatively short timeframe. The only instance I have seen in the recent intense seller’s market where a buyer was contingent was when a buyer was already well into a very solid escrow on the sale of their home.
Regardless of the market, buyers making an offer contingent upon the sale of their existing home sometimes need to make a higher than typical offer price to incentivize the seller. This buyer contingency can sometimes include a clause in which the seller can cancel and move on to another buyer, usually after a certain period of time has elapsed.
Common Real Estate Contingencies
One of the broader contingencies covering buyers, the inspection contingency enables a buyer to conduct various inspections and due diligence. If some adverse condition were to come up that is unacceptable to the buyer (and that the seller isn’t willing to remedy in a request for repair), the buyer can cite this contingency as a reason to cancel their purchase. That issue could be relatively minor issue that is still of concern to the buyer, or it could be something more substantial like major foundation issues. In California, the default timeframe for removal of this contingency is 17 days after acceptance, however buyers seeking to be more competitive often shorten this timeframe.
Although an appraisal contingency can be left in place on an all cash purchase, it is most typically used in a financed offer. The contingency stipulates that the property appraise at or above the agreed upon purchase price. If the appraisal comes in below that figure, the buyer has the option to cancel the contract. However, the buyer may elect to adjust their down payment and/or bring in additional cash, or the seller may lower the purchase price (or some combination of the those). In other words, a low appraisal can give a buyer an option to cancel, however the purchase often moves forward with some adjustments made by one or both sides.
Also called a mortgage contingency or financing contingency. This contingency is commonly found in any financed purchase. A buyer will generally not remove this contingency until their loan has made it through underwriting and their lender has assured them it is safe to do so. It is vital buyers have a pre-approval in place prior to making an offer to help minimize surprises on the lending side of the purchase. In California, the default timeframe for removal of this contingency is 21 days.
Title Report Contingency
Most residential real estate purchases here in San Diego involve a title company investigating the title of the home. If there is a “cloud on title”, or some significant issue or defect pertaining to title, this buyer contingency enables the buyer to cancel the purchase if they choose to.
HOA Documents Contingency
This contingency is primarily found on condo sales and in planned communities where a Home Owners Administration presides. If the buyer protected by this contingency finds issues of concern with the HOA, or its CC&R’s (covenants, conditions and restrictions), the buyer can choose to cancel their purchase.
Home Sale Contingency
Please see the sections above on “Contingency for the Sale of Buyer’s Home” and “Seller’s Purchase of Replacement Property.”
What is a Non-Contingent Offer?
This term gets used in two different ways, which can definitely cause some confusion. I will cover the two most common ways we typically hear it in California:
1) Referring to a buyer making an offer, where the buyer does NOT have a contingency for the sale of their current home. Conversely, a “Contingent” offer can mean they are making their offer contingent upon the sale of their current home.
2) Referring to a buyer that has removed ALL their contingencies with their offer. This very risky approach to purchasing has become more common in highly competitive seller’s markets, but is still relatively uncommon in San Diego. There are other markets in California where this type of non-contingent offer is the norm though. In just about all cases I am aware of, a buyer making an offer without any contingencies in place is doing so against the advice of their broker.
Active vs. Passive Contingency Removal
In California, contingency removal is an “active” process. What this means is that even when a deadline for a contingency removal has passed, the contingency remains in place until it is actively removed. By active removal, the party who is served by the contingency needs to remove the specific contingency in writing. There was a time in California when contingency removal was passive. In that time period, if the deadline for a contingency passed without any objection, the contingency was considered removed.
Contingent vs. Pending
Now that you hopefully have a more clear understanding of contingencies, let me potentially confuse things a bit. There are several statuses that you might see when viewing properties online. Unfortunately, the exact status terms and sometimes what those terms mean can vary among different areas and different MLS services. Active, pending, under contract, sold, etc. are some of the more common status terms you will see.
If you are seeing “contingent” on a listing online, in San Diego that usually refers to a special status where a seller has accepted an offer, but the sale is “contingent” on court approval, bank approval related to a short sale, etc). It’s a specific status in the MLS (like “active” “pending” or “closed”) but is not referring to a buyer or seller having a contingency like the ones discussed above. “Contingent” status when viewing listings online is pretty uncommon in San Diego. Unfortunately, there are areas outside San Diego, where a “contingent” status refers to a completely different type of contingency.
Pending status (again, speaking for San Diego), refers to a sale in which acceptance has been reached between a buyer and seller. This is sometimes referred to as “under contract” or “in escrow.” Given the amount of variation in the status definitions we see on online listings, I would encourage you to talk with an agent in your area to make sure you understand what each status means.
Real Estate Contingencies Summed Up
Ultimately, real estate contingencies can be the difference between a successful transaction and a complete disaster or a potential lawsuit. For buyers, what contingencies are included in an offer, and the details / timelines of those contingencies, can be the difference between missing out on a dream home or getting an acceptance.
While many aspects of a purchase agreement can be consequential to the parties involved, the details covered by contingencies are often the most uncertain and the most consequential. For these reasons, it is crucial to have a firm understanding of any contingencies included and omitted from your real estate transaction.
As a quick reminder – none of the information presented here should be construed as legal advice. Please consult with an experienced agent in your local market and potentially with a legal professional to make sure your interests are protected in the context of your circumstances, the property in question, laws pertinent to your area, etc.
If you or someone you know might be buying or selling real estate in San Diego, regardless of location or price point, please let me know. I can also assist in connecting buyers and sellers outside San Diego with outstanding Sotheby’s International Realty agents via our 1000+ offices in over 60 countries. Please read my client reviews, and don’t hesitate to call, text or email me with any real estate questions or to schedule a no-obligation consultation.