Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].
Question from Curt in WY: Hi Brian, My wife and I are very excited to be buying our first home. It is a little bigger and in a better neighborhood than we thought we could afford. The payments will be a bit of a stretch for us, but we are preapproved for the mortgage. The seller accepted and signed our offer three days ago. This evening, my wife and I showed the real estate listing to her parents. We were expecting to see the listing status as “Sold.” What it does say is “Contingent Offer.” What does that mean? Why doesn’t it say “Sold?’
Answer: Hello Curt. Don’t be alarmed. A contingent sale just means that some details still need to be worked out. The home inspection and the appraisal are the most common. But it could be some other contingency that you put in your offer. National Association of REALTORS® (NAR) statistics from 2021 say that only about 5% of sales fall through. Unless you have a good reason to be skeptical about a contingency clause in your offer, chances are very good that your home purchase will go through to closing.
With that said, one thing that you should probably look for is if the seller added a “kick out” clause to the contract. It would be a change to your offer, and you would have had to sign an amended or revised offer. Your agent should have pointed out any changes to you. The most common use of a kick out clause is when the buyer must sell their current home in order to buy their next home. The kick out can allow the seller to continue accepting offers hoping for one that isn’t contingent on the buyer selling their current home. Or it could give the buyer has a specific amount of time to sell their home before the new home is offered to other buyers.
Curt, because this is your first home a kick out clause to sell a current home doesn’t make sense. However, there are other uses for a kick out clause such as a financing contingency. You did say you were a little surprised that you could afford this home. In this case, a kick out clause gives the seller more leverage during the contingency period. It could allow the seller to kick out your offer if they receive an offer without a financing contingency (all cash). Generally, if the contingent status has a kick out clause, it means that there’s a deadline for the buyer to fulfill all contingencies. Without a kick out clause, there’s no set deadline in place.
The financing isn’t done until it is done. First-time buyers often think that once they are preapproved, the mortgage is a done deal. But in many ways that is just the start of the process. After you find a house and have an accepted purchase agreement, the underwriting process for the mortgage begins. This is a deep dive into the buyer’s finances. This is why buyers should not make any big financial changes between the time they are preapproved and when a sale closes. Changing jobs during this period could mean losing your approval for the mortgage. So could buying a car with payments because that changes your debt-to-income ratio. This is a time to keep your finances as stable as possible.
Another common contingency is the home inspection. The seller does not have an obligation to fix anything that is found wrong with the house. During these times of multiple offers and even bidding wars, a seller might decide to move on to another buyer instead of dealing with repairs. Especially if the buyer insists on minor repairs. Curt, you don’t want to accept something major like a failing foundation, but you might have to accept something like windows that are starting to show their age.
Appraisal contingencies can also be a problem in these times of rapidly increasing home prices. For instance, let’s say your offer is accepted for $375,000. However, your lender’s appraisal comes back at only $365,000. The lender might only agree to loan 95% of the appraised value, which is $346,750 of $365,000. Your down payment would have to make up the difference between $375,000 and $346,750. If the appraisal comes in at less than the purchase price, it doesn’t matter if you were approved for a 5% down payment. You must make up the difference in cash or the deal will fall through.
Curt, your next step should be going over the contingencies with your agent again. You and the buyer might both need to take action to clear any contingencies. In the examples, you want to get the inspection and the appraisal done quickly. The seller might have issues with the title that they need to clear up. Your goal is to have the status of the sale changed from “contingent” to “pending.” Still, “pending” doesn’t mean “sold.” But it does mean that you have submitted an offer and the seller has accepted it. All the contingencies should have been met or resolved. Pending should mean that there is nothing left undone except for the closing. But it’s not until all the paperwork is signed at the closing and the money changes hands before the house is “SOLD.”
Please comment with their thoughts and experiences.
Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].