Although the real estate industry has been undergoing a lot of changes and struggling to stabilize, it is still one of the best ways to build wealth. Moreover, real estate sales are on the rise even with the high-interest rates all around.
According to a report published by the National Association of Realtors, approximately 5.95 million estate properties traded hands in 2022. However, this is nothing to be alarmed about as no real estate transaction comes with guarantees.
Every seller, buyer, and real estate property is different, which is why there is no sure-shot way of knowing how a real estate transaction will play out.
When you’re looking to buy a property, you want to protect yourself from unexpected outcomes and ensure it is a safe investment. This is why almost every real estate sale is ‘contingent’ on what happens next meaning buyers can back out if some mishap occurs as the sale moves and before it is completed.
But, what exactly does contingent mean in real estate? It is an inevitable question that must come up and you, as a buyer, must know before purchasing your first commercial property. The concept is applicable to both commercial and residential real estate properties which makes it all the more important.
So, what are you waiting for? Let’s get right into it and learn what contingency is all about to help you invest in better commercial real estate property deals. By the end of this article, we hope you will have a clear understanding of the concept and how it can protect you when making deals.
What Does Contingent In Real Estate Mean?
In simple terms, contingent means “subject to specific conditions and circumstances”. For real estate deals, this means that the buyer has made an offer for the property and the seller has accepted it, but the deal is dependent on certain circumstances.
That is, before the deal is complete, buyers and sellers must meet the set criteria.
For example, you might interested in investing in real estate property and have made an offer. But, you have explicitly specified that both parties will go through with the offer only if the property meets all industry standards and legal regulations set in place.
This means that the deal is effectively a contingent real estate contract and will only be finalized if the property’s legal documents are in place.
How Does A Contingent Real Estate Offer?
In the case of a contingent real estate offer, the specific terms and conditions must be stipulated at the very beginning. Once the condition is stated, it is obvious that the deal will only move forward to finalization if all the set conditions are fulfilled and the requirements are met.
In case the conditions are not met, the deal falls through and the original contract is null and void. The only option left to the seller is to move to the backup offer that they had received when the original deal was contingent.
As it is clear, contingencies are often put in place to protect buyers from future problems and help them avoid investment in problematic listings and bad deals.
After all, most issues with a real estate transaction are often not visible until it is too late. We can also look at another example to make the concept clearer and help you better understand the options that are left once a contingency falls through.
In some cases, commercial real estate investors might stipulate that they will make an offer contingent on an inspection showing that the building is environmentally sustainable.
If the inspector deems that the building is not environmentally sustainable, it is unacceptable based on the terms set, and an active contingent status is placed on the property. Now, the seller has two options:-
- Renovate the property to ensure it is environmentally sustainable
- Lower the asking price since the property doesn’t fulfill the established conditions
As for buyers, they can either go ahead with the deal based on the seller’s decision or choose to completely pull out of the deal. Since a contingency was placed on the original deal, the potential buyers can pull out of the contract without any penalty.
A contingent deal on a property is more likely to be accepted if the buyers have already secured a lender. The process not only becomes more seamless but also helps alleviate any concerns the selling party might have.
For example, sellers might fear that the deal will later fall through due to the lack of financing or due to the inability of the buyers to secure a loan. This is why it is always preferred that the buyers should get Pre-Approved for a Mortgage as soon as they have decided to invest in a real estate property.
It will help increase the approval chances of your contingency offer and also allow sellers to do business with you without any hesitation.
Risks Involved In Contingent Real Estate Deals
Contingent deals are beneficial to the buyers, but most sellers prefer real estate deals that do not come with any contingencies. After all, it is almost like a safety net or an escape clause for the buyer that protects them in case of any problems.
In today’s competitive real estate market, investors and buyers are rushing to find the best deal and once they do, they want to lock on it as soon as possible. So, sellers might have a lot of offers in hand including some that are free of contingencies.
This is why adding contingencies to your deal might be a risky move which is why we recommend weighing all options before making an offer.
Sometimes, buyers might place contingency on deals like your first property must sell before you invest in theirs. This might not be feasible for the seller especially if another buyer offers a competitive price without any contingency.
Then, they would always prefer to go for the second deal instead of accepting yours. This is why it is advisable to place contingencies on real estate deals after careful consideration.
What Are The Different Types Of Contingencies Available In Commercial Real Estate?
Now that we are clear about what contingency in real estate means, we must discuss the different contingency options available. These will help you understand and better evaluate the options you have to help you make better investment deals.
After all, as a buyer, you must be able to choose what contingency you want to include in your offer. This will also help you propose better deals and help you find great income producing real estate investment opportunities that will undoubtedly help you grow your portfolio and wealth.
So, let’s jump right into it and explore the different types of contingencies available in commercial real estate contracts.
Financial Records Contingency
As a commercial real estate investor, it is obvious that you must be looking for great deals. It is also possible that you might be searching for existing commercial operations that bring in a positive cash flow.
This is where including a financial records contingency in your proposal can help. In this type of contingency, buyers are allowed to take a look at the property’s income and expense records for a better evaluation of the overall cash flow.
You must also check out the property’s vendor records and operating invoices to better calculate the property’s cash flow and whether it is turning in any actual profits or not.
Estate Inspection Contingency
Before you invest in any real estate property, it is important for you to ensure that both the building and land are safe and suitable. When you place an estate inspection contingency on your proposal, you ensure that you get a chance to examine the condition of the building and the land it is situated on.
Some other things to check include – the safety of the construction, the condition of the amenities of the building, and the need for improvements (if any). You can also verify the property’s square footage and check whether you can afford to invest in the deal or not.
When investing in a commercial real estate property, it is necessary to ensure that you can do whatever you wish with the property. It is highly possible that the zoning laws set in the area or the locality can forbid you from using the commercial property for what you plan for it.
For example, some zoning laws forbid certain types of renovations and new constructions on existing buildings. This is where a zoning contingency can help and offer you the time needed to check the existing zoning laws and evaluate whether they derail your project plans or not.
Before you invest in a property, you might feel confident about your ability to secure financing. However, it is often a disappointment to some buyers that their loan might not get approved and fall through.
In the case of a financing contingency, you do not have to worry about your lender not financing your property.
What Does Contingency Mean When You’re Looking for a Commercial Real Estate Project?
We have already discussed the different contingencies that are in play when buyers look for commercial real estate projects to invest in. But, now, we must discuss a few things that will help you manage expectations when looking for commercial real estate projects to invest in.
Any real estate agent will advise you to look at more commercial properties and make offers rather than being stuck with a particular property. Even if you are in the contingent listing status of a property, it is always wise to check out other properties.
After all, in today’s industry of low inventory and surplus buyers, sellers are sure to receive multiple offers. The last thing you want to do is set your hopes on a single property and have the deal overturned due to the contingency not working out.
To tackle this issue, a lot of experienced real estate agents also choose to negotiate other terms like the seller’s rights to accept other offers.
This is why it is always recommended to get in touch with an experienced agent to ensure you get the best out of the deal. After all, they will help you negotiate the terms and get you the best offer for the property you’re looking at!
Contingent Deals With a Kick-Out
These deals mean that sellers can continue considering other offers when the contingency of the first offer is being worked out. After all, sellers do not want to miss out on deals with lesser contingency clauses as they mean lower burden.
From the buyer’s point of view, contingencies can be helpful, it can be really difficult for sellers and might make it harder for you to find good deals. So, we recommend proposing a deal with fewer contingencies in place.
Contingent Deals With No Kick-Out
Although some sellers like having a kick-out clause, some may accept a contingency deal with no kick-out provision. This is especially true when they are unable to find good offers and are ready to hold looking at other offers while the contingencies are worked out.
Do Contingency Real Estate Deals Fall Through?
Whether you are a buyer or a seller, it is obvious you want to know whether contingency deals fall through.
And, if yes, how often? So, yes, contingency deals fall through, and according to a report by the National Association of Realtors, approximately 5% of deals fall through. This is a small number and does not add too much risk of a failed investment deal.
The main struggle with a contingency offer is its acceptance, but once both parties accept the terms, there is a relatively lower chance of the deal falling through. Another point to remember is that most of these deals that fell through happened due to buyer job losses and property inspection issues.
If you’re worried about your offer falling through, we recommend getting in touch with our team of real estate experts who can help you prepare better offers in no time.
Whether you’re investing in your first commercial project or acquiring your dream commercial real estate, it can create a lot of stress.
In these cases, a contingency is a good idea and can help you easily navigate through bad deals and steer clear of listings that are not worth it. After all, it is a great way to safeguard your investment and ensure that everything falls into place.
Interested in learning more about contingency and finding better investment opportunities? Get in touch with our expert team of real estate agents and investors to get access to industry knowledge and secret tips and tricks that can help you strike the best commercial real estate deal in no time!