First-time home buyers in California often have a lot of questions about the different requirements…
When buying a home in California, you have the option to make either a contingent or non-contingent offer to purchase the home. Here’s the basic difference:
- A contingent offer means there are “strings attached,” in the form of buyer protections.
- A non-contingent offer, on the other hand, does not include such protections for the home buyer.
Making a contingent offer on a California home purchase comes with both pros and cons. It gives you additional protection against losing your earnest money deposit, but it might also make your offer less attractive to the seller.
If you’re not familiar with this kind of terminology, keep reading below! After that, you can decide if making a contingent offer is the right thing to do, based on your local real estate market conditions.
What Is a Real Estate Contingency in California?
Let’s start with a basic definition. A contingent offer is an offer to purchase real estate that is subject to certain conditions being met before the sale can be finalized. These conditions are known as contingencies.
When a home purchase offer includes contingency clauses, the sale cannot proceed unless those contingencies have been met or satisfied as outlined in the contract.
Here are the most common contingencies used by home buyers in California:
- Home inspection contingency: This contingency allows the buyer to back out of the sale if the home inspection reveals significant problems with the property.
- Mortgage financing contingency: This contingency allows the buyer to exit the deal if they are unable to obtain financing for the purchase, for whatever reason.
- Appraisal contingency: This contingency allows the buyer to back out of the transaction if the property appraises for less than the purchase price.
Advantages of Making a Contingent Offer
In California, home buyers make contingent offers to protect themselves from unforeseen problems with the property or with their own finances. Contingencies give buyers a way to back out of the sale if something goes wrong, without losing their earnest money deposit in the process.
Let’s use the mortgage financing contingency as an example…
A mortgage financing contingency works like a safety net for home buyers who need a mortgage loan to facilitate their purchase. It gives the buyer time to secure a mortgage, without having to worry about losing their earnest money.
After the seller accepts the buyer’s offer, the buyer typically has a certain amount of time to finalize their mortgage financing. This window is referred to as the “contingency period.”
If, for some reason, the buyer cannot get the loan or the terms are not what they expected, the financing contingency lets them back out of the deal while keeping the earnest money.
Obviously, different types of contingencies work in different ways. But the overall goal is the same. When you make a contingent offer to buy a house in California, you are giving yourself exit strategies in the case of events that are beyond your control.
This is the primary advantage and benefit of making a contingent offer. It protects you from legal consequences, including the loss of your earnest money deposit, in situations where you have to exit the deal.
Potential Downsides and Disadvantages
The main risk of making a contingent offer in California is that the seller might not accept it. Sellers tend to prefer non-contingent offers from buyers, because it gives them more certainty about the sale closing.
From the seller’s perspective, contingent offers introduce an element of uncertainty into the transaction. The seller may be concerned that the deal could fall through if the buyer invokes contingencies, leading to additional time on the market and potential financial implications.
In a competitive seller’s market, where multiple offers may be on the table, sellers might be more inclined to favor non-contingent offers for their perceived reliability and simplicity. As a result, buyers presenting contingent offers may find themselves at a disadvantage when competing for a property.
But all of this is market-dependent, and it underscores the importance of researching your local real estate market before making an offer.
In a slower market, the seller might only receive one offer at a time. If you make a contingent offer and the homeowner has nothing else to compare it with, they might be inclined to accept your offer as-is.
But in a more competitive market, sellers often receive multiple offers at the same time—possibly within the first few days of listing the property. This is especially true in markets with low inventory levels.
In this kind of scenario, the seller might cherry-pick what they perceive to be the best offer, prioritizing non-contingent offers over those that include contingencies. So that’s something to consider as well.
Our advice is to have a conversation with your real estate agent about contingencies, before you even get to the offer stage. An experienced agent will be able to tell you how likely sellers are to accept a contingent offer, based on the level of competition and other factors.
Five Things to Take Away from This Article
We’ve covered a lot of important information in this lesson, so let’s wrap up by summarizing the key takeaways.
- A contingent offer is an offer to purchase real estate that is subject to certain conditions being met before the sale can be finalized.
- The most common contingencies used by home buyers in California are home inspection, mortgage financing, and appraisal contingencies.
- Contingent offers protect buyers from unforeseen problems with the property or with their own finances.
- The main risk of making a contingent offer is that the seller might not accept it.
- In a competitive seller’s market, sellers may be more inclined to favor non-contingent offers.
Have mortgage questions? Bridgepoint Funding serves borrowers all across California and offers a wide variety of home loan options. If you have mortgage-related questions or need help choosing the right type of financing, please contact our knowledgeable staff!