Whether you're a first-time buyer, first-time seller, or it's just been a while, there are some things you should know about real estate contingencies. It's incredibly rare that a deal will happen without contingencies and some are far more common than others.
Your real estate agent will help you throughout the entire process, but having a basic understanding will help. Here's a look at what real estate contingencies are and three of the most common you should understand.
What are Real Estate Contingencies?
A contingency happens when an offer is made with a condition. The condition may be something, such as a clean home inspection or the ability to obtain financing. Usually, the contingencies are a part of the purchase agreement or contract and must be cleared before closing on the home.
One of the most common contingencies you will run into as a buyer or seller is the appraisal contingency. Every lender providing mortgages will require an appraisal and this contingency isn't just for the lender. It's also to help protect the buyer from overpaying for the home.
An appraisal is a process of determining the market value of a home during the escrow period. It's used to ensure the agreed-upon purchase price is not higher than the market value of the home determined by a professional appraiser.
It the appraisal comes back at a lower price, the buyer will have the right to cancel the contract. This can also be an opportunity to renegotiate the price and work towards closing. If the seller isn't willing to negotiate, the buyer can cancel the contract and move on with their home search.
As the buyer, you may waive the appraisal contingency in a seller's market to help strengthen your offer. If you do this, you are guaranteeing the seller the price you negotiated. However, your lender will still require an appraisal and will only grant financing if the appraised value works for the loan.
The only time you won't see a finance contingency within a real estate transaction is when the buyer is paying in cash. Financing must be secured and the finance contingency helps to protect the buyer from any issues during the underwriting process once the purchase agreement has been signed.
Usually, the buyer will have a specified amount of time to secure financing. The financing contingency may also list out the amount of the down payment, the loan terms, the interest rate and the type of the loan.
Often, buyers will come in with an offer including a pre-approval letter from their lender. This letter will state they have been pre-approved for financing as long as specific criteria are met during the underwriting process.
Sometimes, a buyer may opt out of the financing contingency in a hot real estate market. This may pose a risk but does make the offer look more appealing. However, if the buyer cannot obtain financing, they will likely forfeit their earnest money deposit and could end up with other issues.
The final of the three most common real estate contingencies you should understand is the inspection contingency. This contingency may also be called the "Due Diligence Period". It includes getting a home inspection done to ensure the home doesn't have any major issues and you, the buyer, are satisfied with the condition of the home.
It's strongly recommended that every home buyer gets a home inspection done before buying a home. A standard inspection will look at the general integrity of the home, along with the electrical system, HVAC system, any potential safety issues, the attic, the basement, the interior plumbing, and the garage. Inspectors will not open up walls or ceilings and they won't dig below the ground.
You may also need additional inspections in some circumstances. A general inspection will not include radon, mold, lead paint, asbestos, sewer lines, methamphetamine or pests. Usually, these come at an additional cost but may be worth paying for.
The inspection contingency is one buyers should never waive, but sometimes they do to make their offer stronger. Most of the time, your real estate agent will advise against waiving this contingency as you want to make sure you're getting a home in the condition you're comfortable with.
Whether you're the buyer or the seller, you should be familiar with these three real estate contingencies. They are found as a part of nearly all real estate transactions and only in special circumstances will they be waived or not included. Make sure you speak to your real estate agent about these three contingencies and get their advice before deciding to waive any of them.