Conditional Offer: Definition, How It Works, and Types

What Is a Conditional Offer?

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 contingent on meeting certain conditions. These could include passing a background check, medical clearance, visa clearance, and reference checks.

Understanding Conditional Offers

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 offer's conditions are satisfied, the buyer or seller will then be obligated to purchase or sell the property. If the conditions are not met, they are not obligated to complete the transaction. The time frame of a conditional offer is often short, as the seller will not want to tie up the property for an extended period.

Types of Conditional Offers

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 home inspection, that can be in a conditional offer.

Sale of Current Home

The homebuyers may need to complete the sale of their current residence for the deal to proceed. The condition might be required because the buyers' assets are mostly tied up with their current home. For example, the sale of the current home might be needed to use a portion of the money for the down payment on the new house.

Bank Financing for the Buyer

A conditional offer could be in a place where the sale of the home is contingent on the buyer getting bank approval for a mortgage. If the financing falls through, it nullifies 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 buyer's current home, financing for the new house would likely be contingent upon the completion of the sale. In other words, the buyer wouldn't be able to get funding 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 make changes that go beyond repairs and general maintenance. These improvements could include landscaping, repaving the driveway, adding a deck or porch, expanding the house's footprint, 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. Suppose local approvals are not granted for the changes. In that case, a buyer needs to use the property as intended, and the conditional offer might be withdrawn.

Criticism of Conditional Offers

Unfortunately, conditional offers can sometimes be used as a way to discriminate against underrepresented groups and persons 65 years and older. Discrimination is more familiar with conditional employment offers than conditional home purchase offers.

In particular, smaller employers have many opportunities to put different conditions on potential employees. For example, a small business owner might insist that a potential employee of a particular race take a drug test and pass a background check. Similarly, they could demand that an older adult take a physical examination as a condition of employment. If they only have one employee, there might be no way to prove discrimination.

Potential homebuyers may have an advantage in avoiding discrimination because they are technically the ones making the offer. However, there is still some scope for conditional offers to facilitate discrimination. The seller might insist that the buyer obtain financing within a short timeframe before agreeing to the conditional offer. That potentially leaves the buyer at the mercy of a discriminatory lender. Getting pre-approval for a mortgage can help borrowers to avoid this situation.

In some cases, conditional offers can have discriminatory effects similar to legacy clauses. Costly changes to the property might be required as a condition of the sale, perhaps due to zoning laws. Many of these laws were not in effect decades ago, when discrimination was more prevalent. Furthermore, the people who bought local properties earlier frequently do not have to follow the new zoning rules. In actual practice, new community members, often underrepresented people, face expenses that established residents do not.

Special Considerations

Some real estate agents will continue to show the property to other buyers to pressure the conditional-offer buyer to expedite the process. However, it's vital to disclose to other potential buyers that there's a conditional offer. If another buyer makes an offer, the contract or proposal needs to be structured so that the sale only goes through if the first conditional offer does not materialize.

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. The seller would be required to notify the original buyer that another offer has been made. The original buyer would have a specific amount of time to either waive or satisfy the condition. If the condition isn't met within that period, the seller would be released and allowed to sell to the second buyer.

The Bottom Line

In real estate, a conditional offer is an agreement between a potential homebuyer and a seller stating that the latter will make an offer when a specific condition is met, like passing a home inspection. This agreement is only valid when the sale of the home is contingent on the buyer getting bank approval for a mortgage. The conditional offer protects the buyer by preventing the property from being sold to another buyer. However, the seller has the right to add an escape clause to the conditional offer, allowing them to sell the property if a better offer comes along during the process.