At some point in the home buying process, you’ll be ready to make an offer. This offer you make will include both your offering price and a set of legal clauses called contingencies. Price alone does not determine how appealing or unappealing an offer is. These contingencies you include will be just as important. The dropping of one or more can make the difference between your deal being accepted or the seller going with someone else. Contingencies come in a number of different forms and will indicate certain things that will need to happen in order for the sale to move forward. Their purpose is to protect the buyer in case something goes wrong and they have to exit the deal. Below are the five most common.
Of all the contingencies, the inspection contingency is the one most people are familiar with. It’s there to protect the buyer and allow them to get the full picture of the home they intend to purchase. One or more professionals will be brought in to inspect various parts of the property. Once the buyer has these reports, they’ll be able to negotiate with the seller on repairs or remediations if needed. If no agreement can be reached, then the buyer is free to walk away from the deal.
When buying a co-op or condo apartment the inspection contingency is usually not needed. The common areas, walls and roof will be the responsibility of the building to maintain. With so many apartments in each building this maintenance charge is usually inconsequential. However, it’s always better to include it if you have any doubts or are buying a resale.
Those buyers who need financing to complete a home purchase will want a financing/mortgage contingency. This clause allows buyers to back out of a deal if they are unable to secure financing for the purchase. Many first-time buyers make the mistake of thinking that just because they’ve received mortgage pre-approval then their loan is a sure thing. This is far from the case as there is still the underwriting process to go through which will take a closer look at their finances. If they fail to meet the requirements or something unexpected comes up like losing their job, then the lender reserve the right to reject the loan application. The financing contingency gives buyers a safety net to get out and still be refunded their down payment.
With a loan comes the need for a home appraisal. The lender needs assurance that the property being purchased is actually worth the amount the buyer has agreed to pay. If the appraisal comes back saying that the market value of the property is less than the sales price, then the contract can be terminated. Some appraisal contingencies allow the buyer a certain window of opportunity to fix the problem and move forward. They must either make up the difference or negotiate with the seller for a reduction in the sales price. But if neither of these can be done then the contingency allows them to back out of the deal without penalty.
The title is a legal document which shows the record of its homeownership, both past, and present. It will also show a record of any liens, judgments or other issues. When going through the home buying process, a title company or your attorney will review the title before closing to see if there are any issues. Some issues can be resolved before the closing day. However, if something cannot be resolved then this contingency comes into effect. This way the buyer can exit the deal rather than take on a property with contested ownership or having to pay off someone else’s debts.
Home Sale Contingency
It sometimes happens that a buyer has to sell their current home to raise the funds needed for a new home purchase. The home sale contingency allows them a specified amount of time to find a buyer. If they are unable to then the clause allows them to exit the deal and get their deposit back. Obviously, this contingency is not favored by sellers as they’ll have to take their home off the market with little assurance that the buyer will actually purchase it. It’s usually taken as a last resort when no other buyer can be found. In competitive markets, with limited inventory, this contingency can actively work against a buyer.
There are numerous other contingencies, but these are the most common types to encounter. What sellers need to keep in mind is that contingencies can be something of a double-edged sword. They protect you and allow a legal way out if something unexpected comes up. but they also make your offer look less appealing to the seller. Those like the home inspection and financing contingencies are par of the course in most deals and few sellers will object to them. But as you move away from these the less appealing you make your offer look. Your guide in deciding what contingencies to include should be the current market.