What’s a contingency in a real estate purchase contract?
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The word “contingent” refers to something that must occur before something else can happen. In real estate, what does contingent mean? It could be one or several things:
- Your current house must sell before you can close the new house
- You must get mortgage approval from a lender
- The property must pass an inspection
There are many types of contingencies. In general, home sellers prefer “cleaner” offers, with fewer contingencies.Verify your new rate (Dec 7th, 2019)
A contingent offer protects you
Want to pay top dollar for a termite-riddled house or move forward with a purchase if your mortgage falls through? Unless you have the right contingencies in a real estate purchase agreement, you might have no choice.
Whether you’re buying or selling a home, contingencies let you cancel the deal if unfavorable circumstances arise.
In real estate transactions, “contingent” means something that must happen before the sale can close.
As a buyer, for example, it’s wise to make the closing contingent on getting an adequate mortgage.
If you don’t have this contingency, and your financing evaporates, you might have to cancel the deal. In that case, you’ll probably lose your earnest money deposit. The seller might even file a lawsuit to force you to buy the home.
As a seller, you may want a “suitable property contingency.” This lets you cancel or postpone the sale until you’re able to buy a suitable new home. Without this provision, a buyer could use the courts to force the sale by a particular date, leaving you homeless.
But contingencies can be deal killers
Although contingencies protect you by serving as “escape hatches” from bad deals, they can also be deal killers.
In red-hot housing markets, sellers often choose home offers that come with the fewest (or no) contingencies.
Knowing this, some buyers offer a higher sale price to compensate for the contingencies. Others, waive less-essential contingencies to make their offers more attractive. Some buyers, especially those desperate for the home, even waive all the contingencies.
As a seller, contingencies (such as a suitable property clause) often reduce the number of offers you’ll receive. In addition, they weaken your bargaining power, prompting some buyers to offer a lower price.
In general, the more contingencies you insist upon, the more money it may cost you.
Common real estate contingencies
Among real estate experts, some contingencies are considered must-haves.
Less-vital contingencies may be used as leverage in negotiations.
For most home sales, the must-haves are:
Financing. A buyer’s offer is usually contingent on getting financing at or below a certain interest rate.
Home inspection. Unless you plan to tear down the house, the deal should be contingent on a home inspection that does not reveal expensive-to-fix defects.
Payment of closing costs. The buyer and seller should determine who will pay for each common closing cost – e.g., escrow fees, title search fees, recording fees, transfer tax, etc. Although it’s customary for buyers and sellers to pay certain fees, don’t make assumptions. Put it in writing.
Closing date. Typical deadlines for closing a deal are 30, 45 or 60 days. Before agreeing to a closing date, the buyer and seller should agree on how much time they will need to complete the transaction.
Sale of existing home. If you must sell your existing home to help finance the purchase of a new one, include this contingency in your offer.
Suitable home contingency. (See above.)
When should I waive contingencies?
If personal finances and other circumstances permit, you could waive some contingencies to sweeten your offer.
For example, most first-time homebuyers rent or live at home, so they can usually be flexible with closing dates.
If you can pay cash, the same holds true of the financing contingency. Waiving it could give you a major advantage in a bidding war.
On the other hand, you’d have to be insane to waive the home inspection clause. If you waive this contingency after offering (say) $350,000 for a house, and the inspection reveals $30,000 worth of flaws, too bad. You’re legally committed to paying $350,000.
Occasionally, some sellers will waive the suitable property contingency. If they can’t buy a new home before the deadline, they put their things in storage and move to a motel (or live with family or friends) for a while.
Alternatively, the seller and buyer could agree to “rent-back” deal. This lets the seller rent the house for a specified time after the closing. The arrangement delays the buyer’s move-in date, but at least they’re (almost always) assured of getting the house.
Contingencies that are safer to waive
No contingency is 100% safe to drop, but some are safer to waive:
Seller assistance with closing costs. In a slow market, a seller may agree to pay some of your closing costs. Get ready to drop this contingency in a sellers’ market.
An HOA contingency. This lets you back out if you discover “onerous” homeowner association rules. Of course, if you thoroughly research the neighborhood in advance, you won’t need this clause.
Fixtures and appliances. This contingency ensures that certain personal property (such as kitchen appliances) is included in the sale. Unless you can’t afford to buy these items, use this clause as a negotiating tool.
Contingent real estate listings
If you see the word “contingent” in a listing, it means the seller has accepted an offer, but the contingencies haven’t been fulfilled yet.
Among other things, it could mean the buyer is waiting for the home inspector’s report or the mortgage hasn’t been approved yet.
Should you make an offer anyway?
Many agents will advise you not to waste your time. Some sellers won’t even consider an offer because it would create the appearance of double-dealing. And in all likelihood, the deal will close.
But if you absolutely love the home, go ahead. Pre-approved mortgages aren’t always approved, and contingencies aren’t always met.
If time is something you have in abundance, you might just “steal” the home from the other buyer.Verify your new rate (Dec 7th, 2019)