What are contingencies?

Real estate contingencies in a home purchase contract are “walk-away” clauses that let you back out of the deal and get your earnest money back if certain conditions aren’t met.

Think of a contingency as an “if-then” proposition. For example: “If I’m able to sell my current home, then I’ll buy yours.”

Knowing common contingencies prepares you to make a competitive homebuying offer that protects your interests and entices sellers.

Making a contingent offer on a home

When making an offer on a home, you’ll have to decide which contingencies to include in the purchase contract. Your real estate agent can explain each type of contingency and help you decide if any are negotiable.

Real estate contingencies protect your interests, but be aware that too many stipulations in the contract can reduce the likelihood of the seller accepting your offer, especially in a tight market.

Types of real estate contingencies

Here are the most common types of contingencies included in home purchase agreements:

Inspection contingency

A home inspection contingency lets you negotiate the sales price, ask for repairs, or walk away from the sale based on the inspection results.

Your contract may stipulate that repairs must be made if problems are uncovered, but that can lead to closing delays while the fixes are scheduled and approved. You may prefer to renegotiate the sale price if significant improvements are needed.

Sales contracts may also be written with “a right to void.” This means the buyer won’t require repairs suggested by the home inspection report but can cancel the sale without penalty.

In hot markets, buyers may feel pressure to forgo home inspections altogether to win bidding wars. But skipping a home inspection is risky, and there are other ways to strengthen an offer, such as making a larger down payment.

Mortgage contingency

A mortgage contingency gives you an out if you don’t qualify for a home loan. Unless you’re buying a home with cash, a mortgage contingency is necessary even if you’re preapproved for a mortgage. Preapproval is important, but it’s not an absolute guarantee. After a home is under contract, your loan still must go through a final stage of underwriting.

Appraisal contingency

When a home appraises for less than the offer amount, your financing may fall through, or you may have to put more money down to buy the property. A property appraisal contingency lets you back out if the appraisal comes in low.

Home sale contingency

Under a home sale contingency, your offer is subject to the successful sale of your current house. The contingency is most often based on a specific time period — generally 30 to 60 days — after which your contract is forfeited.

In a seller’s market, including this contingency puts your offer at a serious disadvantage because sellers have so many offers from which to choose. All other things being equal, a seller is more likely to select an offer without this stipulation.

Other contingencies

Other standard contingencies can include such things as a termite certification and the definition of a reasonable time period to close the sale. But there may be additional conditions that you want to include in an agreement.

While it’s important to protect your own interests, generally, the more contingencies in your offer, the less enthusiastic the seller may be to deal with you, especially when there are far more buyers than homes for sale.

You’ll have a better shot at dictating terms through contingencies in a buyer’s market. Sellers are more likely to negotiate when there’s a glut of homes for sale.

Home sale contingency deadlines

Keep track of contingency deadlines, so nothing sneaks up on you — and so you won’t miss an important date to enforce a condition that the seller must meet. Having a calendar with all deadlines listed, perhaps even with pre-deadline notices a few days ahead, will help you stay on top of critical contingencies.

Throughout this process, you’ll want your agent to guide you; in more complicated cases, you may even want the advice of a real estate attorney. It’s easy to get tripped up by legal jargon, and sometimes what’s not in writing does the most damage.


Post a Comment