5 Important Real Estate Contingencies You Should Know
Home Buyer
Home Buyer
What is a contingency? In the purchase agreement, contingencies outline the conditions that must be met to finalize a property’s purchase. In other words, the home’s sale is “contingent” upon these prerequisites being satisfied. Contingencies typically serve as buyer protections and give the buyer an “out” if a condition of sale is not satisfied. If a buyer wants to make their offer more competitive, they can choose to purchase the home without contingencies since most contingencies are more of a buyer perk than an obligatory contractual element.
How does a contingency agreement work? When an offer is placed on a property, contingencies are outlined in the offer. Once negotiations are final and an offer is accepted, the purchase agreement will reflect the agreed upon contingencies and their respective deadlines. Contingencies are to be satisfied during the escrow period, and each different contingency has a specific deadline. Once the deadline arrives, the contingency is removed and is no longer grounds for abandoning a contract.
Example: Imagine a buyer has a 10 day inspection contingency and a 12 day loan contingency. Once escrow opens, the buyer has 10 days to complete inspections, and then once that contingency is removed, they have 12 days get their finances in order. If during that 10 day inspection period the buyer discovers something wrong with the property, they can pull out of the contract. However, after that 10 day period ends and the contingency is removed, inspection results are no longer grounds for quitting the contract.
The appraisal contingency allows buyers to hire a licensed appraiser to assess a property’s value and compare it to the selling price. If a property’s purchase price is higher than the appraisal price, then the buyer is allowed to back out of the deal or try to renegotiate the price. If the seller refuses negotiations, the buyer can end the contract.
This contingency offers buyers a very important protection because buyer’s are unable to get financing for any more than the appraised value of the home. If the home’s purchase price is higher than its appraised value, then the buyer will need to pay the difference out of pocket. For example, a house priced at $1.2 million but appraised at $1 million will cost buyers $200,000 out of pocket.
An inspection contingency is one of the most common types of contingencies and is often referred to as a “due diligence” contingency. Inspections allow buyers to verify that there aren’t any undisclosed issues with the property before they commit to the purchase.
Examples include inspections for pest/termites, asbestos, mold, plumbing, and more.
The loan contingency gives buyers a set period of time to secure financing for the home. When a contract includes a loan contingency, it also states loan terms for which the buyer must be approved. If a last minute change prevents the buyer from getting the financing they need, this clause allows them to end the deal without facing repercussions.
Many buyers try to sell their current home while looking for a new home. A home sale contingency refers to a purchase agreement that is dependent upon the buyer’s current home selling within a certain period of time. If the buyer is unable to sell their home during the allotted time, then the contract is nullified. This protects the buyer from being responsible for both their current and new home.
A “title” refers to home ownership records for a property. A title contingency verifies the property’s ownership and is a period during which title disputes can be resolved. Typically, a title company or real estate attorney will perform the title search to determine if there are any issues. Examples of title issues giving the buyer walk-away power are land disputes or liens that must be resolved prior to resale.
Contingencies can be complex and confusing at first, but they offer valuable protections to home buyers, and sometimes even sellers. Although they are not necessary to a contract, contingency agreements are commonly negotiated. Sellers are often attracted to offers with no contingencies because contingency agreements can delay the close of escrow and give buyers an option to opt-out of the contract. For buyers wanting to submit a lower offer price but still remain competitive, removing contingencies can be a great way to stand out. However, it is also important to protect yourself during such an important transaction. Discuss your options with your Realtor, and remember that contingencies should be evaluated on a case-by-case basis.
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