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What Homeowners Need to Know About Contingencies

Congratulations, you have outmaneuvered other buyers with a bit of fancy footwork (and luck) and have an accepted offer. Those new to the real estate game may not realize that the path to an agreed-upon price isn’t usually this exhausting (or competitive). What you have just experienced is an unprecedented hyper-reaction to an ongoing event of global proportions – the post-post-Covid real estate market.

Despite the remnants of a negotiation hangover, you need to recognize you are about to execute a legally enforceable document (aka – a contract of sale or purchase agreement). If you seek the best possible outcome, you must (with the help of agents, mortgage specialists, & attorneys) make vigilant, well-thought-out decisions.

Buyers & sellers use contingencies to hedge against an anticipated need for protection. There are several common contingencies a buyer can expect to see in a typical contact. Still, the reality is, a contingency is acceptable if it is mutually agreeable to both parties and is lawful.

Contingencies are negotiating tools that can help sweeten an offer. But too few may be risky, and too many may turn the seller off – especially in a wildly competitive market.

Real Estate Contingencies – The ‘If-Then’ Propositions of the Legal World

Real estate contingencies refer to specific conditions defined in a real estate contract. Contingencies are negotiated terms/conditions that determine the fate of a real estate transaction, as dictated by relevant laws and regulations.

Home Inspection Contingency

Depending on the severity & the extent of the results of a home inspection (and the exact wording of the contract), a buyer may have the option to walk away from the deal, ask for repairs, or even renegotiate the sales price. The choice of solutions depends on a combination of issues, including the buyer’s current living situation, the identified repairs, and the seller’s receptivity.

Pro-Tip – Buyers may feel pressured to forgo the contingency for a home inspection in a crazy competitive market in hopes of winning a bidding war. The risks inherent in this strategy are considerable and NOT ADVISABLE.

Mortgage Approval Contingency

This contingency provides buyers a side exit from the contract if their home loan is denied. Like a home inspection contingency, a mortgage contingency (even if you have a preapproval) is necessary for all buyers, except cash buyers.

Appraisal Contingency

An appraisal contingency is an essential conditional protection that offers buyers viable solutions/exits should the subject property appraise beneath the sales price. Ultimately, this impacts the buyer’s financing and puts the transaction at risk. This contingency can offer the buyer an exit or the opportunity to renegotiate the price if the sellers are willing.

Home Sale Contingency

A home sale contingency, which is usually time-defined, simply means that your offer to purchase is conditioned on the sale of your current home (likely because you need the funds from that sale for this purchase). The contingency is often based on a specific time — generally 1 to 2 months — after which the contract is canceled.

In a hot market, a home sale contingency places a purchase offer at a serious disadvantage. Ask yourself – all things being equal, wouldn’t you prefer an offer without a stipulation such as this?

The Bottom-Line

In the current market, buyers must balance protecting their interests while determining which contingencies they are willing to forgo. But the more contingencies in a buyer’s offer, the less enthusiastic the seller is likely to view the offer.

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