A conditional offer is an agreement between two parties that an offer will be made if a specific condition is met. Conditional offers are used in real estate transactions whereby a buyer's offer on a home is contingent on something getting done for the purchase to go through. In other words, something has to occur before a sales transaction is finalized.
A conditional offer can also refer to an offer of employment that is contingent on meeting certain conditions. These could include passing a background check, medical clearance, visa clearance, reference checks, and many others.
Conditional Offers in Real Estate
Conditional offers are most frequently used in real estate transactions. A conditional offer could occur when a buyer agrees to purchase a property with the condition that the home passes a home inspection. Once the conditions of the offer are satisfied, the buyer or seller will then be obligated to purchase or sell the property. If the conditions are not met, the buyer or seller is not obligated to purchase or sell the property. The time frame of a conditional offer is often short since the seller will not want to tie up the property for an extended period.
Some real estate agents will continue to show the property to other buyers in order to put pressure on the conditional offer buyer to expedite the process. However, it's important to properly disclose to other potential buyers that there's a conditional offer on the property. If another buyer makes an offer, the contract or any offer needs to be structured in a way that the sale only goes through if the first conditional offer does not materialize.
- A conditional offer is an agreement between two parties that an offer will be made if a specific condition is met.
- Conditional offers are used in real estate transactions whereby a buyer's offer on a home is contingent on a home inspection.
- Conditional offers can also come into play with an offer of employment that's contingent on the interviewee passing a background check or drug test.
Types of Conditions in a Conditional Offer
Conditional offers for real estate transactions could be dependent on a variety of factors. The conditional offer protects the buyer by preventing the property from being sold while the specific conditions are satisfied. If they are not, the seller is released and allowed to sell to another buyer. However, the seller is stuck in a holding pattern while waiting for the buyer to meet the conditions in the offer letter.
Below are a few of the most common conditions, besides the aforementioned home inspection, that can be in a conditional offer.
Sale of Current Home
The buyer of the home may need to complete the sale of their current residence in order for the deal to proceed. The condition might be needed because the buyer’s assets are largely tied up with the current home. For example, the sale of the current home might be needed to use a portion of the money for the downpayment on the new home.
Bank Financing for the Buyer
A conditional offer could be in place whereby the sale of the home is contingent on the buyer getting approved for a mortgage loan from a bank. If the financing falls through, it would nullify the conditional offer. For example, the bank’s valuation of the home might come in at a lower price than the agreed upon price between the buyer and seller. In other words, the mortgage loan wouldn't cover 100% of the selling price. The buyer would have to come up with the difference between the bank financing and selling price or convince the seller to sell for the lower price.
Also, if there's a mortgage loan out on the current home, financing for the new home would likely be contingent upon that sale being completed. In other words, the buyer wouldn't be able to get financing for the new home without paying off the mortgage on the current home.
Building and Renovation Permits
A conditional offer could hinge on approval from the local government for zoning and building permits. It is not uncommon for buyers of homes to want to make renovations and changes that go beyond repairs and general maintenance. These improvements could include landscaping, repaving the driveway, adding a deck or porch, expanding the footprint of the house, or installing a swimming pool. The buyer might also want to create or renovate space for a home-based business.
Extensive changes to a home may require building permits and other clearances from the municipality before any work can be performed. If there is a provision against conducting business in a residential area, setting up a home-based business might also require a zoning variance. If local approvals are not granted for the changes a buyer needs to use the property as intended, the conditional offer might be withdrawn.
Real estate agents might also suggest that the seller insert an escape clause into the conditional offer in case a better offer comes along. An escape clause is specific wording written into the Purchase and Sale Agreement that states the seller can entertain other buyers even if there's a conditional offer on the property. The seller would be required to notify the original buyer that another offer has been made. The original buyer would have a specific time period to either waive or satisfy the condition. If the condition isn't satisfied within the period, the seller would be released and allowed to sell to the second buyer.