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Why home buyers need contingencies

By Trulia | Published: Oct 14, 2009 | 15 Comments

Anyone who is thinking of purchasing a home or has ever owned a home has heard about contingencies. What are contingencies?

Contingencies are clauses in a real estate contract that stipulate various conditions that must be met by the buyer and the seller for a sale to go through. For example, many buyers write into the contract that being able to close on the sale of their own home is a condition of the offer to purchase the new home. That way, if the sale of their own residence falls through, they will not be obligated to go through with the purchase of the new property.

For buyers, contingencies are important because they can cover them should they be unable to fill the obligations of the contract, or should they decide that they no longer want to purchase the property.

Some buyers -- especially in heated markets where several people may be interested in buying a particular home -- may be tempted to do without contingencies, in order to make themselves look more appealing to the seller and to win in a bid for the home.

But that's not a smart move -- it's essentially like working without a safety net. A contingency is a buyer's backup plan -- if a buyer is working with a good real estate attorney or a smart real estate professional, he will have several contingencies written into the contract to back him up.

After all, when you sign a contract to purchase a home, several thousand dollars -- and possibly, several hundred thousand dollars -- are at stake. Those aren't small potatoes.

These are some of the more prevalent buyer contingencies that are written into contracts, and some you may want to consider writing into your own contract should you think about purchasing a home:

  1. Mortgage financing contingency

    This contingency gives the buyer a way to back out of the contract if an application for financing is denied, or if financing is granted for a lesser amount (say, if the home appraises for less than expected).

  2. General inspection clause

    This contingency allows a buyer to bring in a professional home inspector to inspect the property, and to cancel or renegotiate the deal (e.g., to negotiate a lower selling price with the seller, or to ask him to complete needed fixes to the home) if the inspection turns up less than satisfactory results -- such as significant structural flaws and major (and costly) repairs that are required.

    This clause offers great protection to buyers -- because as we all know, while a home could look great on the surface (e.g., if it was staged or if the seller went to great pains to make cosmetic -- but not major -- fixes), there could be unexpected and expensive problems lurking underneath.

  3. Contingencies for additional tests

    Buyers may want to add contingencies that allow them to have the home inspected for radon, mold and other toxic substances, and for wood-destroying pests like termites. If any problems are found, this contingency should give the buyer the opportunity to renegotiate the deal, or cancel it completely.

  4. Attorney review contingency

    This clause can give the buyer and the seller a specific amount of time (as specified in the contract) to have their attorneys review the signed contract. The lawyer will review the legality of the contract and check for important safeguards.

  5. Sale of buyer's home contingency

    This contingency allows the buyer to cancel the contract (without penalty) if he or she is unable to sell his or her home in a specified amount of time.

  6. Appraisal contingency

    This clause permits the buyer to have the home appraised and to only follow through with the purchase if the appraisal matches or exceeds the home's price.

Comments

By Jeri Creson,  Fri Nov 13 2009, 18:12
I have to disagree, slightly, on a point here. When one says going without contingencies is "not a smart move", the real answer is, "it depends". Everything in life bears some calculated risk. What is important, and I'm relatively sure that what this guide actually means, is that a buyer should be exceedingly careful and thoughtful about going without contingencies. The choice needs to be the buyer's. In some situations - for example, a very well-heeled buyer who is pre-approved with full underwriting, aside from the property itself, has no worries about income or credit issues may decide for themselves that the risk of losing a few thousand is worth the benefit of winning a particular home in a very competitive market. That gamble may not be a safe bet, or a good bargain for a different buyer with limited funds and an uncertain employment outlook. The decision must be personal, and the risk must be justified.

Be informed. If an agent asks you to forego the traditional contingencies, ask "Why?" and "What are the risks/benefits of doing so?" Then make your own decision.

Jeri Creson, Broker
TotalAccess Realty Advisors - Pasadena
jericreson@yahoo.com
By Connie Wildasinn,  Sun Jan 31 2010, 22:42
Great article.. be sure your agent puts in the contigencies that protect you and your deposit... and then don't give up any of them untill you are mandated to do so and you are agreeable with that...
By Mitchell Hall,  Thu Feb 18 2010, 19:59
Good article. I agree with Jeri about some contingencies. Real estate is local. In my market I don't think a seller would ever agree to a buyers home contingency. If the buyer has a mortgage contingency and they can't sell their home then they won't get the mortgage so they are still protected.
By Fran Rokicki,  Mon Sep 13 2010, 16:01
When I meet with my clients to write their offer to purchase, our contracts list all of these options and more. I advise my clients to check them all. That way, if you decide not to do one or more of them, we can remove that or those contingencies. If you don't have it in the offer, initially, it would be difficult to try and add it later on. In Connecticut, we have buyer agency. I hold the ABR designation.
By Terry Bell,  Sat Sep 25 2010, 09:35
Well, one thing you didn't discuss is about the foreclosure and short sale market. It's very different to negotiate contingencies with a homeowner who needs 60 to move anyway, vs, dealing with a bank and vacant house that the bank wants to move asap. With a foreclosure you have to have your ducks in order and be dealing with a lender that can move swiftly, maybe even with a hard money loan, and also, have your contractors or inspectors ready to jump in, so you can offer the shortest contingencies possible to make your offer attractive in a multiple offer situation.
Best, Terry Bell, Realtor
Sonoma County Wine Country
CPS Real Estate
http://www.TerrysHomes4sale.com
By KC Home Inspector,  Mon Mar 7 2011, 14:15
Yes.. I agree with "General inspection clause"

Nobody wants to buy or get stuck with a Money Pit!
By Simmonds,  Wed May 4 2011, 00:26
Jeri Creson - glad you are not my agent. You're not the one taking the risks!
By Deborah Griffin,  Thu Jun 2 2011, 18:17
Great article! Buyers need contingencies. Buying a home is a step by step process and you never know what unexpected things might happen. Agents need to represent the best interests of their clients.
By Shawn Rosa,  Tue Dec 13 2011, 11:30
even when attorney review is concluded, these dates are hardly concrete. Few seller's will cancel a deal the minute a contingency date has gone unmet.
By Adrian Provost,  Mon Feb 27 2012, 17:10
Wonderful article.
By Matie,  Fri Jun 15 2012, 02:41
Agree. This articel clears a lot
By masondag07,  Wed Jan 23 2013, 05:49
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By Olga Mackenzie,  Thu Oct 3 2013, 12:10
Appraisal contingencies are quite complicated now in Troy market in Michigan. The bidding wars for the houses make buyers to loose houses to the buyers who have the extra cash money to waive the appraisal in order to get a house they have been waiting for.
So it depends where are you buying a house and the market in that area.
You definitely need a home inspection for the property, to look for serious problems and also learn how to take care the house when you are first time buyer
Home inspection and mortgage financing contingencies must have, others depends on indivisual situation and the property you buy.
Olga MacKenzie at JCI-TROY INC. Realtor
248-649-3800
omackenzie@jcirealtors.com
By Judi Monday, CRS,  Wed Oct 9 2013, 07:44
There are times when not having any contingencies can make the difference between getting the home or not especially in a multiple bid situation. However, its extremely important to weigh the risks when deciding to go without contingencies.
By Carmen Brodeur- Top 1% Realtor,  Tue Dec 3 2013, 08:23
Contingencies are very important for the buyer's protection. A knowledgeable agent will be able to help the buyer decide whether or not waiving a contingency is worth the risk.

http://www.TroonRealEstate.com/meet-the-team

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