If you're currently in the process of purchasing a home, you may have come across the term "contingency." Contingencies are crucial clauses in your contract that provide you with an option to back out if unforeseen issues arise between making an offer and the closing date. These contingencies safeguard your earnest money and can also give you leverage during negotiations with the seller.
What Exactly is a Real Estate Contingency?
A real estate contingency is a specific section in the purchase and sale contract that outlines conditions that must be met within a predetermined deadline for the deal to proceed successfully. If these conditions are not fulfilled, the buyer has the option to terminate the contract.
Real estate contingencies can be either "hard" or "soft." A hard contingency necessitates a physical sign-off, while a soft contingency automatically expires after a certain date. If a buyer needs to cancel the contract due to a contingency, the offer should clearly specify the method for notifying the seller, and a real estate agent or attorney can help navigate this legal process.
Understanding Contingent Offers
A contingent offer is when a buyer makes an offer to purchase a home but reserves the right to withdraw from the deal, with their full earnest money deposit, if the conditions outlined in the contingency clause are not met.
Pros and Cons of Contingent Offers
Utilizing a contingent offer offers several advantages to buyers. It safeguards the initial investment of earnest money, reduces the risk of purchasing a home with unforeseen issues, and protects against potential financial difficulties if the buyer is unable to secure a loan. Buyers can include real estate contingencies for a wide range of reasons, such as evaluating the functionality of home systems or the need for aesthetic repairs.
However, in competitive markets with multiple high-priced offers, sellers may prefer offers with fewer or no contingencies. According to the Zillow Group Consumer Housing Trends Report, 39% of buyers said they waived at least one contingency. Only sellers with limited options may accept offers with excessive contingencies. To remain competitive while protecting their interests, buyers should consult their agent for guidance on which contingencies to include in their offer.
Common Real Estate Contingencies
As you draft your purchase offer, a knowledgeable real estate agent like Scott will consider the property's market value, local competition, and strategies to appeal to the seller while safeguarding your investment with relevant contingencies.
Some contingencies are standard, such as those required by your lender, like the appraisal and financing contingencies. Here are some common real estate contingencies you may encounter while buying a home:
1. Disclosure Contingency: This contingency involves accepting the seller's disclosure form, which provides information about the property's condition and any known issues. You typically have a defined period to review the disclosure and decide whether to proceed with the transaction.
2. Inspection Contingency: This contingency allows you to conduct a professional home inspection and request repairs, or credits based on the findings. Waiving this contingency can be tempting in competitive markets, but it comes with potential risks.
3. Appraisal Contingency: For buyers using a mortgage, an appraisal contingency protects against overpaying for a property. If the appraisal comes back lower than the offer price, renegotiation or contract cancellation may be possible.
4. Financing Contingency: This standard contingency safeguards buyers in case their financing falls through, ensuring they won't be bound to purchase a home they can't afford.
5. Home Sale Contingency: If you need to sell your current home to afford the new one, this contingency allows you to back out if you can't sell your existing property.
6. Kick-Out Clause: Often added to offers with a home sale contingency, this clause allows the seller to continue marketing the home and accept a better offer within a specified timeframe.
7. Title Contingency: Ensures the seller has a clear title to transfer ownership to the buyer, with any issues resolved before closing.
8. Homeowners Insurance Contingency: Allows the buyer to obtain affordable insurance for the property.
9. Homeowners Association (HOA) Contingency: Allows buyers to back out if they are not comfortable with the HOA's requirements or restrictions.
Discuss Real Estate Contingencies with Your Agent
Working with an experienced real estate agent like Scott and the Smolen Team is crucial in navigating contingencies and protecting your interests during the home buying process. Discuss your concerns and deal breakers so that your needs are adequately addressed in your purchase contract. With the right guidance, you can proceed with confidence and make informed decisions throughout your home buying journey.
