BUYER’S TIP # 5: Real Estate Contingencies

BUYER’S TIP # 5: Real Estate Contingencies

Like any big purchase in life, working without a safety net can be risky, especially if a substantial amount of money is on the line. Fortunately, when making an offer to purchase a home, you can protect yourself from the unexpected to ensure you’re getting what you pay for. This is where contingencies come into play.

What Are They?      

The dictionary defines a contingency as “a future event or circumstance that is possible but cannot be predicted with certainty.” The same can be said for home buying contingencies as well. When you include these “contingent” items in a purchase contract, you are essentially giving yourself a way to back out of the contract if a certain event or circumstance occurs.

Another way to understand it is that a real estate contingency is a clause or condition that must be met for the home sale to go through. For instance, if a loan contingency is written into the purchase agreement, then you as the buyer have the right to back out of the sale should some unforeseen problem occur with the procurement of your home loan. The sale is, therefore, contingent upon your loan approval.

How Do They Work?

In order to protect both parties, a standard purchase contract usually has many contingencies already written into it, requiring you to do little more than check a box. The contract will build in a certain amount of time between the acceptance of the offer and the closing of the sale. This period is most commonly referred to as escrow. It is during this time that you work with the seller to meet and remove all contingencies, each with your own varying timeframe set in the contract. For example, the contract may clearly state that you have 17 days to complete all home inspections, after which the inspection contingency must be removed. If you fail to meet that deadline or the inspection comes back unsatisfactory then the sale can be cancelled without repercussion.

Most Common Types of Contingencies

1. Inspection Contingency

Of all the available contingencies, the inspection contingency is the most well-known. It allows you to have professionals inspect the property and provide reports on the functionality and safety of various parts of the home. With these reports, you can negotiate with the seller on how to handle any repairs. If an agreement cannot be met or if you feel that the repairs are just too much, then the sale can be terminated.

Most buyers assume that this contingency applies only to the general property inspection, which is a visual check of the home’s overall condition and certain major systems, such as plumbing, electric, and heating and air. However, several more inspections like mold, chimney, termite, or structural, fall under the umbrella of this contingency as well, regardless of whether you elect to conduct them.

• Loan Contingency

If you’re planning on buying a home with a mortgage, then you’re going to want to use a loan contingency. This contingency gives you time to apply for and receive a loan to purchase the home. Additionally, since preapprovals do not guarantee loan approval, it states that, if for some reason you’re unable to procure financing, you have the right to back out of the sale.

• Appraisal Contingency

If you need a loan, be aware that most of them are subject to an appraisal. This means that once an appraiser determines the fair market value of your home, the mortgage company will agree to issue you a loan up to that amount. However, especially in hot markets, the appraised value of a home can be lower than the sale price you negotiated with the seller. If this happens, you are responsible for covering the difference.

Hence the need for an appraisal contingency. It states that if the appraised value of the home is different than the negotiated sale price, you can opt not to buy. Usually, both parties try to renegotiate the price before this happens, however, if you can’t reach an agreement, this contingency is a nice option to have.

• Home Sale Contingency

As the buyer, you can elect the home sale contingency if you still must sell your current home in order to buy your future one. It defines a specific amount of time in which you’re required to find a buyer for your current home and move forward with the sale. If you’re unable to do so, then you can cancel the purchase of your future property.

Although, a very helpful tool for buying a home, it can weaken your offer. This contingency essentially asks sellers to put the sale of their home on hold while you sell your current home first. All without a guarantee that you will close on your agreement with them. Therefore, sellers will pass over offers with this contingency for one without it, especially in our busy South Bay market.

• Title Contingency

In real estate, the title is a home’s official record of ownership. It’s a legal document that states previous and current owners of the property. During escrow, a title company will research ownership to make sure that no disputes, liens, or other issues exist. Some title issues can be resolved so home ownership can be transferred free and clear. However, if unresolvable problems occur, this contingency gives you a way out.

Keywords: Home Buyer, Buyer’s Tips, Contingencies, Housing Market, Real Estate, Levine Homes, Escrow, Inspections, Loans, Title, Property, Seller, Realtor, South Bay