What are Contingencies in Real Estate?

When it comes to buying a home, you will definitely hear the word contingency. Essentially contingency is a fancy way to describe a clause in a contract that gives the buyer an “out” if something arises from the time you make an offer until you close your purchase of the home. A contingency will also protect you from losing your earnest money if you walk away from the transaction and are required if you want to negotiate any changes with the seller after you are under contract. Basically, a contingency details specific, measurable conditions that must be met by a deadline to successfully advance the deal to closing. If the conditions are not met, the buyer can choose to terminate the contract and get the earnest back.

Most real estate transactions include contingencies. Contingencies work to the buyer’s advantage, and in the previous couple of years buyers were commonly waiving contingencies (like, all of them) to get the seller to choose their offer. But now, with the shift to a buyer’s market, contingencies are now becoming the norm again.

By using a contingent offer, buyers reduce the risk of investing in a home with unforeseen issues and avoid financial trouble if you’re unable to acquire a loan (or you lose your job between going under contract and closing—it happens!).  

The Tucker Team can provide guidance around the most important contingencies to include in your specific offer while remaining competitive.

While drafting your purchase offer, The Tucker Team will balance the market value of the property, the local bidding competition and tactics to appeal to the seller while protecting your investment with real estate contingencies. Some contingencies are unavoidable; if you plan to purchase a home with a mortgage, your lender will likely require an appraisal (there are portions of an appraisal contingency that you can waive, but an appraisal is still required). Again, contingencies are there to protect your earnest money.

Here are some of the most common contingencies you may encounter while buying a home:

Inspection Contingency

An inspection contingency ensures you can complete a professional home inspection by a licensed inspector, and then request the seller to make repairs or the seller to give you credits on the settlement sheet at closing based on the results. The Tucker Team will schedule the inspection for you, meet you at the property, and chat with our rockstar inspectors. You’ll then have a brief timeframe to request reasonable repairs or potentially terminate the transaction based on what you find. If all goes well with the inspection, the contingency is considered met. 

Sometimes it makes sense to limit the inspection contingency to requesting repairs relating only to health, safety, and sewer. Other times it makes sense to waive the inspection entirely. Note! This does not mean that if the house is falling apart and you find it on the inspection, you are stuck buying the house. It just means you will not ask the seller to make any repairs to the home based on what you find at inspection.

This can get tricky very quickly and is even more reason why it is important to have experienced agents like The Tucker Team: we can talk through what inspection contingency makes the most sense in your unique situation.

Appraisal contingency

For buyers using a mortgage, lenders often require you to hire a professional, independent property appraiser. They will walk through the home, take pictures and measurements, and note its condition. If the appraisal comes back at or above the sale price, the contingency is considered met.

If the appraisal comes back lower than the offer price, but the purchase price is in line with comparative market analysis, you could ask the mortgage lender to have another appraisal done. Your contingency allows you to attempt renegotiating a lower sale price with the seller to match the appraisal. But in more competitive markets, if the final appraisal remains too low, the lender cannot loan you more than the property is worth and you’ll have to make up the difference in cash. If you’re unable to make up the difference in cash, the appraisal contingency allows you to cancel the contract. 

Waiving the appraisal contingency also is not as clear as it may seem. Let’s say that you are bringing more than 20% down on your purchase of a $500,000 home. The house appraises for $450,000. YIKES! But wait! you weren’t going to put the standard $100,000 down, you were going to put 30% or $200,000 down. In this instance, the lender was only going to loan you $300,000 to complete your purchase of the home. With a house “worth” $450,000, the lender will still be in an excellent position to complete the loan because the loan to value still makes sense for them.

Have I mentioned how important an experienced agent is to explain all of this!????? :)

Financing contingency

Another standard contingency for buyers purchasing a home with a mortgage is a loan contingency. This protects you if your financing falls through, ensuring you won’t have to pay for a home you can’t afford.. 

Home sale contingency

Typically, when you hear that you are making your offer contingent you think of this one: you need to sell your current home to afford the new home. This contingency lets you out of the deal if you aren’t able to sell your home. We are seeing more and more contingent offers get accepted whereas in the last two years, anything contingent was automatically rejected by sellers because most sellers want a free and clear offer that can close without delay.

Homeowners insurance contingency

To get your home loan, you will have to obtain homeowner’s insurance. It’s not optional. However, that insurance could cost far more than expected due to the risks of your property, such as proximity to a flood zone or presence of mold. You can protect against this by making the purchase contingent upon your being able to obtain affordable homeowner’s insurance.

If you’re unable to acquire affordable insurance, your contingency allows you to drop the purchase contract.

Homeowners association contingency

If the property is within a homeowners association (HOA) with requirements you reject, a homeowners association contingency is your out. Written carefully, your contingency could protect you against issues such as limited exterior paint colors or a neighboring fence in the wrong place, a strict parking requirement, the ability to rent your property or any host of things that might be deal breakers. So basically, you won’t want to buy a house in Highlands Ranch. :)

The key is to make sure including an HOA contingency is important enough to you to outweigh the possibility of potentially writing a less competitive offer.

Discuss real estate contingencies with The Tucker Team before making an offer.

By working with The Tucker Team, you can rest assured that your interests and investments are central to our negotiation strategy. We can’t wait to discuss your concerns and property deal breakers so that your needs are thoroughly detailed in your purchase contract.