The world of real estate is chock-full of jargon that you may be unfamiliar with. If you plan to buy a home, one term that you’ll want to know the meaning of is “conditional offer.”
But what does a conditional offer mean? And why should you, as a buyer, choose to make a conditional offer on a home?
Key Points You Should Know About Making A Conditional Offer
- A conditional offer allows buyers to protect themselves by including conditions that must be met before the offer becomes legally binding.
- Common conditions included in a conditional offer are financing, inspection, appraisal, and home sale conditions.
- If the conditions are not met, the buyer can back out of the offer without any repercussions. Essentially the offer becomes void and the buyer will get back their deposit.
Conditional Offer Meaning?
A conditional offer is an agreement to buy a home as long as certain conditions are met. These conditions must be waived or fulfilled by a specific date and time before the offer is considered “firm” and binding between both parties. The time frame for these conditions varies, though they typically last anywhere from 3 to 7 days.
Buyers typically make conditional offers as a way to protect themselves. It gives them time to make sure all aspects of the real estate deal are satisfactory before they’re legally required to go through with the transaction.
If the conditions included in the conditional offer are met in time, then the deal will be sealed and the seller will retain the buyer’s home deposit. In this case, the buyer will be obligated to purchase the property, and the seller will be obligated to sell it.
On the other hand, if the conditions are not met, then the offer is void and the buyer will get their deposit back.
| What Is An Unconditional Offer? A house offer with no conditions is called an unconditional offer. This means there are no conditions the seller must meet aside from the clauses that already come with a purchase-of-sale agreement. Once a seller accepts the unconditional offer, you’re legally bound to purchase the house. |
Types Of Conditions You Can Make In An Offer
There are several conditions that buyers can include in an offer. However, some are far more commonly used than others. Here are some conditions buyers typically include in a conditional offer:
Financing Condition
A financing condition is a very important one that is usually included in a conditional offer. This condition gives you some time to apply and get pre-approved for a mortgage to finance the home purchase. This condition will state that the financing you can get is satisfactory to your discretion.
Without a financing condition, you could be in big trouble if you seal the deal on a real estate transaction and discover later on that you can’t get a mortgage. A financing condition can help you avoid this headache by giving you some time to get the funding needed to go through with the sale. If you’re unable to get approved for a mortgage, you can back out of the deal and get your deposit back without repercussions.
Inspection Condition
A home inspection is another popular offer condition and for good reason. While you may have scoped out the home during your initial visits, you may have overlooked significant issues with the property. Many problems may be lurking behind walls and under floors, making it nearly impossible for you to notice them.
That’s why you should never skip a home inspection before you finalize the deal. A home inspection condition will give you a few days to schedule and carry out an inspection. Your inspector will provide you with a detailed report of what was found, and any major red flags will be communicated to you.
If you find issues with the home that you’re uncomfortable with, you don’t have to proceed with the purchase. Or, you may decide to ask the seller to fix the problems as part of a condition of the sale. You could also ask the seller to reduce the price of the home to accommodate the extra costs needed to make the necessary repairs.
Either way, this condition will afford you these options. Without this condition, you could be stuck with a money pit.
Appraisal Condition
Having the home appraised is helpful for you and your lender. For starters, you want to make sure that you’re not paying more for the home than what it’s worth. An appraisal will provide you with a formal estimate of the property’s value.
Your lender will likely order an appraisal and appoint an appraiser to conduct it to ensure that the subject property is worth the loan amount. An appraisal condition allows you to have the home professionally appraised to satisfy the lender’s requirements.
If the appraisal comes in low, the lender may not agree to the mortgage unless you make up for the difference in cash. If you can’t cover this difference, the appraisal condition allows you to walk away from the deal or make alternative arrangements with the seller.
Since appraisals are usually done by the lender, they’re essentially part of the financing condition. An appraisal condition serves more as a clause that states that the seller will allow the appraiser to have access to the home in the event that an appraisal is ordered by the lender.
Home Sale Condition
While not commonly used, a home sale condition may be used by buyers to ensure they can sell their current home before they enter into a real estate agreement to buy a new home. Essentially, this condition means that the sale is conditional on the buyer selling their current property.
Although this may be reassuring for buyers, sellers don’t typically like to see these conditions, as they can delay the sale. And if the buyer is ultimately unable to sell their current home, the deal could become void. This would leave the seller right back at square one, marketing their home and finding a new buyer. It’s not uncommon for some sellers to reject this condition.
What Happens When You Make A Conditional Offer On A Home?
One of three things may happen when you put in a conditional offer on a home:
The Offer Is Accepted
Ideally, the seller will immediately accept your offer. The transaction would then be dependent on the offer conditions being waived or fulfilled by their respective due dates.
The Seller Counters The Offer
More often than not, conditional offers are countered by sellers. This means that the offer is not rejected, but rather the seller wants to change some aspects of the offer. For example, the seller may counter with a different offer price, deposit amount, or closing date. The seller will then hand the offer back to you for review.
You can choose to accept the seller’s revisions or counter their offer yourself. This process can go back and forth until a deal is reached, or until the date of the offer expires.
The Offer Is Rejected
Sellers who don’t like some aspect of a buyer offer typically tend to counter. But there are times when some sellers may choose to reject the offer altogether. If the seller rejects your offer, you can either draft up a completely new offer or look at other properties.
What Happens If You Back Out Of Your Offer?
Buyers can only back out of their offer if they’re unable to satisfy a condition. Or, there may be situations outside the scope of the real estate contract that may be present, such as an unknown lien on the title of the property.
But if there are no conditions in the offer or all conditions have been signed off by both parties and considered fulfilled, buyers can not pull out of the deal without repercussions.
If you decide to back out of your offer without just cause, you could lose your deposit, which could be thousands of dollars. You could also face litigation from the seller. For instance, the seller may come after you for expenses paid to relist their home. They could also sue you for loss in the value of their home if they end up selling for a lower price.
This is why including conditions in an offer and ensuring they can be met (or waived) is very important. Essentially, these conditions give you a legal exit strategy.
That said, it’s not unheard of for buyers to back out of a deal for any reason and use any condition as a means to do so. It would be very difficult for sellers to legally prove that the buyer is backing out for an illegitimate reason. Essentially, buyers can walk away from a conditional offer during the conditional period for any reason.
Do Conditional Offers Work In A Seller’s Market?
Current market conditions play a role in the freedom and flexibility that buyers have when it comes to conditions in their offers.
In a buyer’s market, buyers have more negotiating power and may be more inclined to insert conditions in their offers. Sellers have fewer buyers to choose from, so they are more open to entertaining conditional offers.
However, this environment is different in a seller’s market. When there are plenty of buyers and not enough housing inventory available to them, sellers have the upper hand and have the pick of the litter.
In this scenario, buyers may have to sweeten their offers to compete against other buyers vying for the same home. One way to make their offers more attractive to sellers is to leave conditions out, or at least minimize the number of conditions included.
Of course, there are risks to “clean” offers, as they essentially become firm offers right off the bat. This leaves no opportunity for buyers to back out of the deal if there are issues with financing, inspections, appraisals, and so forth.
Final Thoughts
Conditional offers are commonplace in real estate. In fact, they’re highly recommended as a way to ensure buyers are protected. If you’re thinking of making an offer on a home, consider making it a conditional offer. This will help you avoid any uncomfortable and potentially serious situations.
