Understanding Contingencies

A contingency is a statement or a stipulation that is added to a contract that will allow one the right to back out of the deal without penalty under specific circumstances. Contingencies are often used by buyers who aren’t 100% convinced they’re ready — or able — to buy the property, and want some extra time to finalize the idea of purchasing a new home. Here’s a review of the most common contingencies you’ll find in a real estate purchase offer:

Types of Contingencies

Property Inspection Contingency — this is generally considered to be the broadest of the contingencies included within the standard contract used by most realtors which states that the buyer has the right to cancel a contract based on their evaluation of the “factors and circumstances related to the Property” and all physical and non-physical aspects of the Property and any other matter, on- or off-site, that materially affects the value and/or desirability of the Property. This is very broad. Hence, a buyer that includes such a contingency may be at a considerable disadvantage when facing another offer that does not include this broad language because the contingency gives the buyer almost unfettered discretion to back out if there is anything not to their liking. On the other hand, a thorough review of disclosure information and inspection reports may uncover significant issues that deserve further investigation. It would be foolhardy to move forward with a non-contingent offer under these circumstances unless the buyer was planning to extensively remodel or rebuild.

Financing Contingency — the financing contingency is considerably more narrow in that it only applies if the buyer makes a timely application and a good faith effort to obtain financing. Occasionally, poorly advised buyers believe that they can submit an offer with a financing contingency and back out of the deal if they change their mind or if they determine that the home’s physical characteristics don’t suit their needs. Many don’t realize that their deposit is at risk under these facts just as if they had no contingency at all.

Appraisal Contingency — the appraisal contingency is also a very narrow contingency, but it may be important to a qualified buyer who is worried about over paying for a home or someone that is only putting down 20 percent.

Sale of the Buyer’s Home Contingency — from the seller’s perspective, it is very difficult to accept an offer that is contingent upon the sale of another home because the seller has very little insight into the value of the buyer’s home and the buyer’s willingness to accept a reasonable offer. Generally, a buyer that is convinced that a home will sell would be better served by putting in an offer without the contingency but with a longer close of escrow. This would shift the risk that the buyer’s home won’t sell to the buyer, the person that has access to the pertinent information and control over acceptance. Plus, the buyer is demonstrating confidence by putting their own money on the line.

These are not the only contingencies that can be included within a real estate purchase agreement. But they are some of the most common inclusions. It’s wise to use certain types of contingencies when buying a house. They prevent you from getting “trapped” into buying a home you either don’t want or can’t afford. But you have to exercise good judgement when including these clauses in your contract. One contingency too many, and the seller might reject your offer.

If you are planning to sell your home, let The Incorvaia Team make the process as easy as possible for you. Call us today!