When a seller formally accepts a buyer’s offer to purchase the home, the two parties enter into escrow and begin working toward closing the transaction. It’s a good idea for both buyers and sellers to understand contingent vs under contract, and the differences between these two types of agreements.
Once the escrow process has begun, the buyer and seller must negotiate the terms of the sale until everything is settled and finalized at closing. This process includes conducting inspections and property appraisals, determining payment responsibilities, negotiating any special requests made by the seller or buyer, and more.
During this time, the buyer and seller are under contract — and this agreement to purchase and sell may also be contingent or non-contingent based on the details of the contract.
Defining Contingent vs Under Contract
What’s the difference between contingent vs under contract?
Being under contract, contingent, and non-contingent are all key terms that define the abilities that both buyers and sellers have when it comes to closing, renegotiating, or backing out of the transaction.
To help both buyers and sellers make fully informed decisions at the start of their deal-making process, here is an overview of the differences between contingent vs under contract.
Under Contract Defined
When used in real estate, the term under contract means that there is a legally-binding agreement to purchase and sell the home between the buyer and seller.
Buyers and sellers are not under contract until the buyer’s offer has been formally accepted and both parties have drafted and signed a contract outlining the terms of the deal.
Before this contract is signed, there is no penalty to either party if they decide to back out of the deal and pursue different opportunities. However, once the contract is signed, both parties are legally bound to transact with each other.
Depending on the unique terms of the agreement between the buyer and seller, the agreement can be contingent or non-contingent while under contract. In both cases, it’s possible that the deal can fall through — but, the difference is the losses incurred by breaching the contract.
Contingent vs Non-Contingent
Contingent contracts protect both parties from incurring losses in the event that they need to break out of the contract.
A contingent contract includes clauses that can be leveraged as escape clauses in case certain terms that have been agreed upon previously are not met.
Contingent contracts include contingency clauses stating that certain terms need to be met for the contract to be able to close. In real estate, that means that the contingency clauses must be met before the purchase and sale can finalize and close.
Common contingency clauses include:
- Appraisal contingency
- House sale contingency
- Title contingency
- Financing contingency
- Home inspection contingency
- Home insurance contingency
- Kick out clause
For example, a contract with a title contingency requires that there are no title issues impacting the property in order to close. If issues with the title arise during escrow, the buyer has the ability to forfeit the deal without losing any money deposited to the seller.
Keep in mind that a buyer and seller can be under contract and contingent at the same time.
Non contingent contracts do not offer buyers or sellers protection from loss if they end up backing out of the deal before closing.
While contingent contracts include specific clauses that allow buyers and sellers to back out of the deal under certain circumstances and conditions without incurring a loss, non-contingent contracts have waived all contingencies.
In these contracts, neither the buyer or seller has the ability to forfeit the deal without penalty. However, non-contingent contracts typically benefit the sellers and are a risk to buyers — especially in busy markets.
Non-contingent contracts are typically leveraged by buyers shopping in especially competitive markets who are looking to make a clean, appealing deal in hopes of being accepted by a seller.
By choosing to waive all contingencies, the buyer is incurring the risk of losing their earnest money if they do need to back out of the deal for any reason. On the other hand, sellers in this situation who accept a non-contingent contract are guaranteed to receive the buyer’s lost earnest money or returns from their home sale.
However, sellers can also offer buyers non-contingent contracts when they are selling in a buyer’s market. But, the risk is comparatively low for sellers in this situation compared to that of buyers who waive all contingencies in a seller’s market.
Work with a Top Agent in Your Market
As we just reviewed, contingent vs under contract are two different circumstances for buyers and sellers — and, there are also non-contingent contracts to be aware of.
To help you best navigate the transaction terms involved in buying and selling a home, it’s in your best interest to partner with a talented top agent in your market.
Your top agent will serve as your experienced guide, negotiating on your behalf with your best interests in mind. Get connected with your perfect local agent with RealEstateAgents.com.