Imagine a home-buying scenario where you make an offer, the seller immediately accepts, and the two of you move through closing without any hiccups until you have keys in hand. It’s possible, but a more likely home buying experience is marked by negotiation, counteroffers, and a back-and-forth dialogue between both parties to reach a deal. And in some cases, the deal can fall through.
Contingencies protect buyers and sellers against these natural characteristics of the home buying process and any problems that may arise before a home sale is finalized. They help to shape a buyer’s offer and can be used strategically to make it more appealing. Whether you’re a first-time home buyer or you’ve bought before, you should be aware of common real estate contingencies and the role they play in making an offer on a home.
Making a Contingent Offer on a Home
After you and the seller agree on the price of a home, both parties have certain duties to finalize the transaction. Buyers are responsible for securing financing, having the home inspected, and getting the property appraised. Sellers are responsible for prioritizing the offer on the table and opening their doors to the home inspector when the time comes. The agreed-upon contingencies included in the contract protect the buyer and seller against any issues that may arise during this time.
Contingencies present a spectrum of options to home buyers, allowing them to walk away from a real estate transaction with their earnest money intact or renegotiate the contract. While their inclusion offers protection and negotiating leverage, sometimes their exclusion can be just as effective.
In a seller’s market, competition amongst buyers is high. Escalation clauses, bidding wars, and all-cash offers become commonplace as potential home buyers compete for a limited number of listings. To sweeten their offers in such market conditions, buyers will typically waive their contingencies. This presents added risk due to a lack of protection, but with so much competition around them, buyers are left with no choice but to maximize their offer’s appeal.
Common Real Estate Contingencies
Home Inspection Contingency
After you’ve made an offer, you’ll have a home inspector thoroughly examine the home before the deal is final. If they discover issues with the property, this contingency allows you and your agent to present the seller with a new offer that accounts for the home’s lessened condition, or to cancel the contract entirely.
Also known as a “mortgage contingency,” a financing contingency gives the buyer a specified period of time to secure adequate financing to purchase the home. Even if you are pre-approved for your mortgage, you may not be able to obtain the right loan for the home. If you are unable to finance the purchase, this contingency allows you to back out of the contract and recover your earnest money, and the seller can re-list the home.
An appraisal contingency states that the home must appraise for, at minimum, the sales price. It allows you to walk away from the deal if the property’s appraised value is lower than the sales price, and typically guarantees that your earnest money will be returned.
Home Sale Contingency
If you’re buying a new home while selling your current one, you may want to include a home sale contingency in your offer. This contingency specifies the date by which you’ll need to sell your current home in order to move forward with your offer. If you don’t sell your home by the specified date, the contract is terminated. Home sale contingencies are financially appealing in that they allow buyers to use the proceeds from their home sale to fund their new home purchase. However, these contingencies force sellers to wait until the buyer’s current home sells, which means they likely won’t accept such offers in competitive markets.
Before the sale of a home goes final, a search will be performed to ensure that any liens or judgements made against the property have been resolved. A title contingency allows you to raise any issues you may have with the title status of the property and stipulates that the seller must clear these issues up before the transfer of title can be complete. If an unpaid lien or unpaid taxes turn up in the home’s title search, this contingency also allows you to back out of the deal and look for another home.
Originally Posted by Sandy Dodge.