BUYER’S TIP # 5: Real Estate Contingencies
BUYER’STIP # 5: Real Estate Contingencies
Like anybig purchase in life, working without a safety net can be risky, especially if asubstantial amount of money is on the line. Fortunately, when making an offer topurchase a home, you can protect yourself from the unexpected to ensure you’regetting what you pay for. This is where contingencies come into play.
What Are They?
The dictionary defines a contingency as "a future event or circumstance that is possible but cannot be predicted with certainty." The same can be said for home buying contingencies as well. When you include these “contingent” items in a purchase contract, you are essentially giving yourself a way to back out of the contract if a certain event or circumstance occurs.
Another way to understand it is that a real estate contingency is a clause or condition that must be met for the home sale to go through. For instance, if a loan contingency is written into the purchase agreement, then you as the buyer have the right to back out of the sale should some unforeseen problem occur with the procurement of your home loan. The sale is, therefore, contingent upon your loan approval.
HowDo They Work?
In order to protect both parties, a standard purchase contract usually has many contingencies already written into it, requiring you to do little more than check a box. The contract will build in a certain amount of time between the acceptance of the offer and the closing of the sale. This period is most commonly referred to as escrow. It is during this time that you work with the seller to meet and remove all contingencies, each with your own varying timeframe set in the contract. For example, the contract may clearly state that you have 17 days to complete all home inspections, after which the inspection contingency must be removed. If you fail to meet that deadline or the inspection comes back unsatisfactory then the sale can be cancelled without repercussion.
MostCommon Types of Contingencies
- InspectionContingency
Of all the availablecontingencies, the inspection contingency is the most well-known. It allows youto have professionals inspect the property and provide reports on thefunctionality and safety of various parts of the home. With these reports, youcan negotiate with the seller on how to handle any repairs. If an agreementcannot be met or if you feel that the repairs are just too much, then the salecan be terminated.
Most buyers assume thatthis contingency applies only to the general propertyinspection, which is a visual check of the home’s overallcondition and certain major systems, such as plumbing, electric, and heatingand air. However, several more inspections like mold, chimney, termite, orstructural, fall under the umbrella of this contingency as well, regardless ofwhether you elect to conduct them.
- Loan Contingency
If you’re planning on buying a home with a mortgage, then you’re going to want to use a loan contingency. This contingency gives you time to apply for and receive a loan to purchase the home. Additionally, since preapprovals do not guarantee loan approval, it states that, if for some reason you’re unable to procure financing, you have the right to back out of the sale.
- Appraisal Contingency
If you need a loan, beaware that most of them are subject to an appraisal. This means that once anappraiser determines the fair market value of your home, the mortgage companywill agree to issue you a loan up to that amount. However, especially in hotmarkets, the appraised value of a home can be lower than the saleprice you negotiated with the seller. If this happens, youare responsible for covering the difference.
Hence the need for anappraisal contingency. It states that if the appraised value of the homeis different than the negotiated sale price, you can opt not to buy. Usually,both parties try to renegotiate the price before this happens, however, if youcan’t reach an agreement, this contingency is a nice option to have.
- HomeSale Contingency
As the buyer, you can elect the home sale contingencyif you still must sellyour current home in order to buy your future one.It defines a specific amount of time in which you’re required to find a buyerfor your current home and move forward with the sale. If you’re unable to doso, then you can cancel the purchase of your future property.
Although, a very helpful tool for buying a home, it can weaken your offer. This contingency essentially asks sellers to put the sale of their home on hold while you sell your current home first. All without a guarantee that you will close on your agreement with them. Therefore, sellers will pass over offers with this contingency for one without it, especially in our busy South Bay market.
- TitleContingency
In real estate, the title is a home’s official recordof ownership. It’s a legal document that states previous and current owners ofthe property. During escrow, a title company will research ownership to makesure that no disputes, liens, or other issues exist. Some title issues can beresolved so home ownership can be transferred free and clear. However, ifunresolvable problems occur, this contingency gives you a way out.
Keywords:HomeBuyer, Buyer’s Tips, Contingencies, Housing Market, Real Estate, Levine Homes,Escrow, Inspections, Loans, Title, Property, Seller, Realtor, South Bay