What Does Contingent Mean?

I receive quite a few questions asking “what does Contingent mean” and a number of requests to see properties under Contingent status. The best definition in Webster’s Dictionary for “contingent” is “dependent on or conditioned by something else”.  Before I get into the meaning of Contingent status I feel I need to explain what an escrow is.  Many states do not use escrow companies, but use attorneys instead.  So many mainlander don’t know what “escrow” is.  An escrow company is set up to safeguard the interests of the parties to a sale.  In the old days, you could hand over your deposit to a seller only to find out two weeks later that he had “sold” his property to ten other people and absconded to South America with all their deposits.  The escrow company’s job is to hold the Buyer’s funds in an “escrow” account while making sure that all the paper work is in order and all the documents get properly recorded at the State Bureau of Conveyances on the day of “closing”.  On the mainland closing may be called “recordation”.  This is the day that the title transfers from the seller to the buyer.  The escrow company than distributes the funds as the Purchase Contract stipulates.  The whole process is called “Escrow”. 

Here’s how the sale works.  The buyer’s agent helps the buyer draft an offer, which when completed, the buyer signs.  The buyer’s agent sends the offer over to the listing agent who presents it to the seller for their consideration.  If the sellers accept the offer they also sign it.  Once both parties have agreed on the price and terms of a Purchase Contract and signed it, they have consummated a legally binding contract.  Their agent then takes the signed contract to the escrow company and an escrow account is opened.  At that point the sellers agent is required by their Multiple Listing Service to change the status of the listing in the MLS data base.  The status was “A” for “Active”.  At this point there are two choices, “C” for Contingent, and “U” for Under Contract.  Here’s where the confusion starts.  A Contingent offer is also under contract, but with a contingency.  That is, there are conditions that must be met before the seller must turn the property over to the buyer.  The most common contingency is the home inspection. Fifteen days is the usual amount of time allowed for the Home Inspection contingency.  The buyers are allowed this time to fully inspect all aspects of the property.  If they find something they don’t like within the allotted time period, they can cancel escrow and get their deposit back.  The Purchase Contract is then voided and the property goes “Back On The Market”, and the status is changed back to “A”, Active.  The process is similar with any other contingency.  The next most common contingency if financing.  To get to the point where the lender gives their final loan approval takes 30 to 40 days.  If the lender refuses to grant the buyer the loan they were asking for, then escrow is cancelled and the buyer gets their deposit back.

The point is, when you see a “Contingent” listing, it’s in escrow, in effect it is sold, but there are contingencies.  The only difference is, unlike a listing that has the “U” designation, a “C” listing could come back on the market at a later date.  When it does, it will show up in the “Back On The Market” category of the UPdate.  But while it is “C” it is not available to purchase.  However, it is possible to make “back-up” offers on Contingent listings; but back-up offers stay dormant and are voided if the original escrow closes.  If, however, a contingency is not met and the present escrow “falls out”, then the back-up offer automatically goes into first place and takes over the previous offers position in escrow.  But here is the problem with buyers wanting to see listings that are Contingent: back-up offers are successful only about 10% of the time.  That’s because 90% of the time the home inspection goes well and the buyer gets their loan and the escrow closes.  So if you, as the buyer, were to pay for plane fare and a hotel to come look at property for a week, and you make a backup offer on a Contingent property, then go home to wait and see if the current escrow is cancelled, 90% of the time you will have wasted your time and money.  Then you will have to fly back to Hawaii again to find another property to purchase.  Meanwhile, all the properties you saw the first time have sold.  And most likely the prices of all the new listings are higher than those you saw when you were here the first time.  That’s why I always try and discourage people from looking at Contingent listings.