Need-to-Knows about Real Estate Contingencies
You’ve found a house you’d like to purchase, and you’re ready to make an offer. It’s time to take a closer look at the purchase contract—perhaps the most important legal document for real estate transactions—and decide how you want to modify its terms, including adding various contingencies.
Contingencies? Yes, it’s an uncommon word. The real estate industry is filled with unfamiliar terminology. A contingency refers to particular provisions in a standard purchase contract. If the condition isn’t met, you’re allowed to back out of the purchase, without penalty.
Contingencies are a good thing, in terms of protecting buyers. They can also backfire if you insist on too many contingencies or are competing with less demanding buyers.
Here are several key points to keep in mind.
1. Know the market.
In a seller’s market (when there aren’t many properties in a specific price range or a particular geographic area for sale), contingencies will encourage sellers to find a more accommodating buyer.
In fact, in a strong seller’s market, some buyers severely limit their contingencies and offer more than the seller’s asking price, potentially triggering a bidding war.
In a buyer’s market (when there are more properties for sale than there are interested buyers), sellers are more likely to accept buyer contingencies.
Don’t know what market your area is experiencing right now? That’s okay. Your Accredited Buyer’s Representative specializes in staying current on that information for your local market. Just ask!
2. Understand which contingencies are common (and which aren’t).
Your buyer’s representative can also provide the best advice on which contingencies are appropriate and commonly accepted in your market. Every area operates under different standards and conventions.
A few examples:
- Home inspection - If something is seriously wrong with a house, you’ll want to know before you buy, not after the closing, when it’s too late to address the issue with the seller. Inspections are primarily designed to evaluate the structural and mechanical condition of a property, although specific conventions vary by market. Inspections may also check for mold, radon, pests, lead, septic systems, or other specific concerns. A home inspection (at the buyer’s expense) is a highly recommended contingency clause.
- Attorney review - The seller, the buyer, or both may request a certain number of days to have their attorney(s) review the contract for sale and the closing documents.
- Mortgage financing approval - Smart buyers secure a pre-approval letter from their lender before submitting an offer. However, your mortgage financing could still fail to reach final approval due to findings in the property inspection, a too-low appraisal, or a final review of your financial situation.
- Approval of homeowner association (HOA) documents - If you are buying a property governed by an HOA, you can request these documents before making an offer to ensure the HOA is on solid financial ground. Alternately, this can be a contingency item.
- Early occupancy (with payment of rent) or furniture move in - If your timeframe requires a critical move-in deadline, such as the start of a school year, you may want to stipulate this as a contingency.
- Appraised value - The appraisal may come in lower than your offer, in which case an appraisal contingency can provide an option to attempt to renegotiate the selling price. Also, note that lenders can reject your mortgage application if an appraisal comes in too low.
- Home warranty - A buyer may make the sale contingent on their ability to secure a home warranty on the property. Be aware that some home warranties require a home inspection before purchase to prove that a warranty claim is not a pre-existing condition.
- Sale of a current home - This contingency requires the seller to agree to delay closing until you’ve found a buyer for your current home. It’s a tall request, especially in a seller’s market. If the contingency includes a “bump” clause or “kick out” clause, the seller can continue marketing their home in hopes of finding another buyer.
3. Watch those dates!
If your contract includes deadlines related to contingencies, be sure to monitor them carefully. Your buyer’s rep will help you stay on top of these too.
Dates matter, since even a one-day lapse could put you in jeopardy of non-performance of your contractual obligations, potentially resulting in the cancelation of your purchase contract and loss of your earnest money.
Add any critical deadlines to whatever calendar system you rely upon, as well as alerts a couple of days before the deadline hits.