The Most Important Contingency in Your Contract
A contingency in a purchase and sale contract is an additional document that must be satisfied or completed before the entire transaction can be completed. This could be a home inspection contingency, financing contingency, or an agreement to sell the buyers house first before they can buy the current house.
And while there are many contingencies there is one that probably should never be neglected. Removing contingencies from an offer can easily backfire. Many people think about removing contingencies or not including them in the purchase and sale contract so that offers more attractive to sellers. But, this can backfire when you purchase a home that has more problems than you are willing to deal with if your house doesn’t sell and you still promise to buy the newer house.
Contingencies can actually allow you to back out of contracts under certain circumstances so it’s important to have several of these contingencies in place.
The inspection contingency.
I encourage all of my clients to get an inspection prior to purchase. You are spending tens of thousands of dollars or even hundreds of thousands of dollars on a property and if you don’t know everything you can about the home before buying, you could get stuck with some hefty repair or replacement bills once you sign on the dotted line. This is probably one of the most important contingencies you can get. Once the inspection is completed, the buyer is allowed to request certain repairs from the seller and the seller that has the option to make those repairs or counteroffer. If an agreement cannot be reached the buyer can back out of the purchase and receive the earnest money back.
If your financing the property your lender will require this contingency. Obviously, you cannot purchase the home if your financing is not completed. The idea is to ensure that if you can’t obtain a loan, you can back out of the deal and have your earnest money returned.
The appraisal contingency.
This alone may be the most important contingency because it could save the buyer thousands of dollars. Once the buyer makes an offer, the lender orders an appraisal. If the appraisal comes in lower than the price the buyer agreed to pay, the buyer can either back out of the deal, make up the difference, or the seller will have to lower the price of the home. This contingency usually stipulates that the appraisal must come in within 5% or 10% of the sale price for the contingency to be satisfied. Buyers can negotiate with the seller to lower the price but it’s really up to the buyer whether or not they choose to proceed.
There are other contingencies such as a home sale contingency or neighborhood feasibility contingency that may be waived in certain circumstances but the appraisal, financing, and home inspection are really your top three.