Buyers and sellers share a common foe in real estate: An over-abundance of paperwork filled with acronyms, abbreviations, and nearly unintelligible legalese. Your real estate professional can help you decipher all of it, of course. But having some basic understanding of important concepts will help you feel empowered in your decision-making. In this post, we’ll cover a biggie: contingencies.
What’s a Contingency?
Quite simply, contingencies are “if-then” agreements: “If these things happen, then I’ll buy your house.” Although contingencies are negotiated between both parties, they’re primarily for the buyer’s protection. If the agreed-upon conditions aren’t met, the prospective buyer can walk away without legal or financial consequences. Contingencies do shield sellers, as well: If the conditions are met and the prospective buyer attempts to renege on the contract, they’ll lose their deposit, at best. At worst? They’ll be found in breach of contract and could be forced to purchase the home anyway.
Know What You’re Signing
Contingencies are common in real estate transactions—and they’re useful to both buyers and sellers. Given the number of documents you’ll be asked to review, you may be tempted to skim over the details and simply sign away. Don’t give in to that temptation. Contingencies are legally binding, and missing even one deadline could bring dire financial or legal consequences on either side of the table. Be sure that you know exactly what you’re signing. And remember that contingencies of any type should be:
- Mutually agreed-upon by both the buyer and seller.
- Written in easy-to-understand language with specific timeframes and terms clearly indicated.
- Crystal clear when stating the conditions under which a buyer’s earnest money/deposit is to be refunded.
There are four main types of contingencies:
Contingency #1: Home Inspection or Due Diligence
This type of contingency allows a buyer to have the property inspected before finalizing the purchase. If the inspection uncovers problems, the buyer can back out or ask the seller to address the issues. If the parties reach an agreement about repairs to be made and the seller follows through, the buyer is then legally bound to fulfill the sale contract.
Pro Tip: As a buyer, never waive a home inspection contingency. Yes, the cost of the inspection comes out of your pocket—even if the deal falls through—but a good home inspection is far less costly than, say, replacing a main sewer line three weeks after you move in.
Contingency #2: Appraisal
This type of contingency allows time for the home to be professionally appraised, protecting the buyer from entering into a sales contract a lender may not approve. For example, if a seller is asking $425,000 for a home that appraises for only $375,000, the buyer would have to come up with the difference in cash. To protect against that situation, buyers can rescind their offer when appraisals come back below asking price.
Pro Tip: If the appraisal comes back lower than expected and you don’t want to lose the home, you can request a second appraisal (still on your dime, of course). Otherwise, if your contingency is properly worded, you can attempt to re-negotiate the purchase price so it fits the appraisal. Motivated sellers will often accept such deals.
Contingency #3: Financing or Mortgage
These contingencies give the buyer more time to secure financing for the purchase. If the buyer can’t come up with a loan, they can withdraw from the contract without repercussions. Although this contingency can be frustrating for a seller, it’s still in their best interest; there’s no point in entering into a sales contract a buyer can’t afford.
Pro Tip: As a buyer, seek pre-qualification from a mortgage lender so you have a rough idea of a reasonable purchase budget. This will save both you and your seller time and irritation.
Contingency #4: House Sale
A House Sale Contingency provides buyers time to sell their current home before they fulfill the contract on the new property. These agreements are particularly useful to buyers, as it protects them from ending up with two mortgage payments if their current home doesn’t sell before the closing date on the new one. For sellers, the drawback is obvious: an “under contract” sign appears in their front yard, but there’s no guarantee that the deal is actually done.
Pro Tip: As a seller, consider including a “kick-out” clause in your house sale contingency. Kick-outs allow you to continue to market your home and entertain offers from other prospective buyers. If you receive another qualified offer, you can approach the current buyer and request that they remove the contingency within a particular time frame (often 72 hours). If they refuse, you can walk away from that contract and sell your home to the new buyer.
Also, before entering into a house sale contingency, it’s a good idea to check on the status of your buyer’s current home: Have they even put it on the market yet? How long has it been on the market? Is their asking price comparable to other homes in their neighborhood?
To ensure your contingencies are worded correctly and enforceable, be sure to involve a knowledgeable and experienced real estate professional. The right real estate partner will help you stay on top of terms and timelines, as well. Questions about buying or selling a home? We’d love to earn the opportunity to help you navigate the Real Estate process! Visit Vegas One Realty online, or contact us here or at (702) 768-1115.