Real Estate Contingencies – What To Consider
In today’s market, many sellers are receiving multiple offers on listed properties. Multiple offers give sellers a lot to weed through while determining which is the strongest offer. One way to compare offers is to look at the different contingencies listed, or terms within the contract, and determine which carry added risk to the seller. Let’s examine several contingencies and what they may mean on a contract.
Home Inspection Contingency
Many buyers include a home inspection contingency on a sales contract as a way to protect themselves. This contingency allows buyers to back out if something major comes up on the inspection and the two parties cannot make an agreeable compromise. Some sellers prepare for this contingency by having a pre-listing inspection done and available. If the seller learns of any repairs that need to be done, they can be completed before listing or inform the buyers and possibly include an allowance for repair.
In the current high-demand market, some buyers have been waiving home inspection contingencies as a way to sweeten their offer. Some buyers may be required by their lender to have a home inspection done.
Home Appraisal Contingency
A home appraisal contingency is designed to protect buyers from paying more for a house than its market worth. If the appraisal comes back lower than the contract price buyers can walk away without any repercussions or negotiate with the seller to lower the price. In a market like this, an appraisal can make a transaction go awry, so most sellers prefer to not have an appraisal contingency and for the buyer to have extra cash reserves at the ready to address a low appraisal.
Many buyers who are using a mortgage to buy a home will have a financing contingency on their contract. Among other things, this contingency sets a timeline that the buyer must meet all lender requirements. If the buyer has an issue that arises and they cannot find financing within the timeline stipulated on the contract, their offer can be canceled and their earnest money returned depending on the contingency terms.
Home Sale Contingency
A home sale contingency is not unusual amongst buyers who are using a mortgage to purchase a new property but already own existing real estate and may not be able to carry two loans. This contingency can make sellers uneasy as now their home sale is encumbered by someone else’s home sale. There are some factors that can make a home sale contingency less risky such as determining if the property is under contract and if the contingencies on that contract have been cleared. If they have been, it is less likely for that contract to fall through and jeopardize the other, though there is still risk.
Contingencies are commonplace on all real estate sales contracts, though different markets see different preferences among buyers and sellers. As your real estate professional, we are happy to provide you with more information on contingencies and help you make a plan that is right for your next real estate transaction.