Here are the five most common contingencies in a real estate transaction.
Contracts with fewer contingencies are more likely to reach closing in a timely fashion, and sellers are more likely to accept a buyer’s offer if it has minimal contingencies. What kinds of contingencies are there, though?
1. Home inspection contingency. This gives the buyer the right to have the home inspected professionally and request repairs by a certain date, typically within a five- to 17-day window from the purchase agreement date. Now, depending on where you live, you may be required to make home repairs for structural defects, building code violations, or even safety issues. Most repairs are negotiable, and for some items, it’s common to haggle over fixes and offer funds for the other party to make the repairs themselves.
2. Appraisal contingency. A property must pass an appraisal, the process by which its value is assessed by a neutral third party. The appraisal verifies that the home is worth at least enough money to cover the price of the mortgage. In the event that the buyer can’t make their mortgage payment, the lender will foreclose on the home and sell the property to recoup at least some of its costs. Generally, the homebuyer is responsible for paying for the appraisal, which typically takes place within 14 days of the sale contract signing.
3. Financing contingency. Also known as the mortgage contingency or the loan contingency, this protects the buyer if the lender doesn’t approve their mortgage. Although the time frame financing contingencies can vary, lenders report that buyers generally have 21 days to obtain mortgage approval.
4. Sale of current home contingency. Depending on the buyers’ financial situation, their offer may be contingent on the sale of their current home. Usually, buyers have a window of 30 to 90 days to sell their current home before the sales agreement is voided. Naturally, this contingency puts you, the seller, at a disadvantage because you can’t control whether someone else’s home sells in time.
5. Title contingency. Before approaching a mortgage, the lender will ensure that the borrower has a clear title. The buyer’s title company reviews any potential easement or agreements that are on public record. This ensures the buyer is becoming the rightful owner of the property, and that the lender is protected from ownership claims over liens or fraudulent claims from previous owners, clerical issues in the courthouse documents, etc.
With the exception of the sale of current home contingency, these contingencies are standard for most home sales. The sale of current home contingency tends to be used more often in what we call a ‘move-up’ buyer’s market, where conditions present buyers with the opportunity to move to much larger homes or land lots.
Contingencies are always negotiable, with one major caveat: The mortgage lenders do require borrowers to have appraisal and financing contingencies or they won’t approve the loan. So, it’s up to you to decide what you’re comfortable agreeing to. Remember: An experienced agent can help you navigate these contingencies and make the decisions in your best interest.
If you have further questions on any of these contingencies or real estate in general, please reach out by phone or email. I’m always here to help!