Real Estate Contingencies

One term that often comes to the forefront in home-buying is “contingency.” These are specific conditions outlined in the purchase contract, acting as essential safeguards and procedural steps. They are designed to protect both the buyer and seller from unexpected situations that may arise during the transaction process.

For buyers, contingencies offer a layer of protection, allowing them to back out of a deal without an earnest money penalty under specific circumstances. For sellers, while they can pose potential delays, understanding and negotiating these clauses wisely can lead to a smoother transaction.

Types of Common Contingencies in Real Estate

In real estate transactions, several types of contingencies can be included in a contract to protect the interests of both the buyer and the seller.

Here are a few examples of common contingencies:

Inspection Contingency:

This contingency allows the buyer to have the property professionally inspected within a specified period. It’s one of the most common and significant protections for buyers.

The purpose is to uncover any major defects or necessary repairs in the property that might not be apparent during a casual walkthrough.

If significant issues are found, the buyer can either negotiate repairs or credits with the seller, or in some cases, back out of the deal without losing their earnest money deposit.

Financing Contingency:

• Also known as a mortgage contingency, this gives the buyer a set amount of time to secure home financing from a bank or a mortgage lender.
• It’s crucial because it protects the buyer from losing their earnest money if they cannot secure a mortgage.
• If the buyer is unable to get a loan, they can opt out of the contract without financial penalties.

Appraisal Contingency:

This contingency ensures that the property is valued at a minimum, specified amount, which the lender will use to determine the amount of the loan.

If an appraisal values the property lower than the expected amount, this contingency allows the buyer to renegotiate the price or withdraw from the purchase without losing their earnest money.

It’s especially important in markets where property values can fluctuate significantly.

Sale of Current Home Contingency:

Common for buyers who need the funds from selling their current home to purchase the new one.

This contingency means that the transaction is dependent upon the sale of the buyer’s existing home.

It provides a safety net for buyers who cannot afford two mortgages simultaneously but can make the offer less attractive to sellers in a competitive market.

Each of these contingencies serves a specific purpose and offers a certain level of protection to the parties involved in a real estate transaction. For buyers, they provide an escape route if certain conditions aren’t met, while for sellers, understanding these contingencies can help in assessing the seriousness and capability of the buyer.

Navigating Contingencies as a Buyer

For buyers, including the right contingencies in a real estate contract is a balancing act. While they provide necessary protection, overloading an offer with contingencies can make it less attractive to sellers, especially in a competitive market.

Here’s how buyers can navigate this complex landscape:

1. Prioritize Your Contingencies

• Assess your specific situation to determine which contingencies are most important. For instance, if you’re unsure about your mortgage approval, a financing contingency is crucial.
• In markets where homes often have hidden problems (like older neighborhoods), an inspection contingency is vital.
• Read more about the home inspection process.

2. Understand the Market

• Your approach to contingencies should reflect the state of the market. In a buyer’s market, you have more leeway to include multiple contingencies. In a seller’s market, however, you may need to limit them to make your offer competitive.
• Consult with your real estate agent to understand the local market dynamics and how they might impact your contingency strategy.

3. Be Reasonable with Timeframes

• Timeframes for contingencies like inspections and securing financing should be realistic. Too short, and you might not be able to meet them; too long, and the seller might balk.
• Again, your real estate agent can provide guidance on what’s standard and reasonable in your market.

4. Communicate with Your Lender and Inspector

• Ensure that your lender is ready to move quickly on your mortgage application.
• Have a home inspector lined up as soon as you make an offer so that you can schedule an inspection immediately if your offer is accepted.

5. Consider the Risks of Waiving Contingencies

• In highly competitive markets, you might be tempted to waive certain contingencies. Be aware that this increases your risk. For instance, waiving an inspection contingency could mean you’re financially responsible for any unforeseen repairs.
• Discuss the potential risks and benefits with your real estate agent and consider seeking legal advice if necessary.

6. Stay Informed and Be Ready to Act

Keep informed about each step in the process once your offer is accepted. If a contingency reveals a problem (like a bad home inspection), you’ll need to decide quickly whether to negotiate, ask for repairs, or walk away.

For buyers, the goal with contingencies is to protect your investment without weakening your offer’s appeal. By understanding which contingencies are essential for your situation and navigating them strategically, you can make a strong offer while safeguarding your interests.

Dealing with Contingencies as a Seller

For sellers, managing contingencies is about striking a balance between securing a solid deal and accommodating reasonable requests from the buyer.

Here’s how sellers can effectively handle contingencies in a real estate transaction:

1. Evaluate the Buyer’s Offer Carefully:
   • Review each contingency in the offer. Understand what each one entails and how it could impact the sale timeline and your obligations.
   • Consider the likelihood of each contingency being an issue. For example, if a buyer includes a financing contingency, assess their pre-approval status to gauge the risk.
2. Negotiate Contingencies:
   • If an offer has too many contingencies or ones that seem excessively cautious, you can negotiate to remove or alter them. This is common in a seller’s market where you might have multiple offers.
   • Work with your real estate agent to understand which contingencies are standard and reasonable in your market.
3. Be Prepared for the Inspection Process:
   • Understand that the home inspection might reveal issues that need addressing. Be prepared to negotiate repairs or offer credits to the buyer.
   • Consider having a pre-listing inspection to identify and fix major issues before they become stumbling blocks in negotiations.
4. Understand the Appraisal Process:
   • If an appraisal contingency is included, remember that the appraised value might come in below the selling price, which could lead to renegotiations.
   • Keep comparable property values and recent sales data handy to justify your selling price if needed.
5. Handle the Sale of Home Contingency with Caution:
   • If the buyer’s offer includes a sale of home contingency, understand the status of their current home sale. Is their home already on the market? Is it realistically priced?
   • You might want to include a “kick-out clause” that allows you to continue marketing your property and accept other offers if the buyer’s home doesn’t sell within a specified period.
6. Communicate Clearly and Timely:
   • Keep the lines of communication open with the buyer and their agent. Prompt responses to inquiries and issues can prevent delays.
   • Stay on top of deadlines to ensure that the contingencies are being met in a timely manner.
7. Consider the Buyer’s Perspective:
   • Remember that contingencies are also there for the buyer’s protection. Understanding their concerns can help in negotiating and finding mutually beneficial solutions.
   • Flexibility and willingness to work through issues can prevent a sale from falling through.