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The Single Most Important Contingency to Keep in Your Contract

A home inspector reviewing home for a inspection contingency
Removing contingencies from your offer can easily backfire. In fact, there are a few you'll want to keep -- no matter what.

In hot real estate markets like San Francisco or New York, buyers often have to go the extra mile to make their offer stand out. Some buyers offer sizeable down payments, others write strategic offer letters, some even drop cookies at the door.

And in markets where multiple offers are the norm, it’s not uncommon to waive contingencies, which give buyers the right to back out of contracts under certain circumstances.

But not so fast. . .While removing a contingency could result in a faster transaction and be attractive to a seller, you could find yourself paying for the removal of unnoticed black mold in the attic or absorbing the cost of a lower valued appraisal. On the other hand, if you tie up a contract with too many “what ifs,” the seller is more likely to reject your offer due to contract delays, risks, or potential costs it forces them to incur.

Some contingencies are more important than others to include. Purchase agreement contingencies are related to the final cost of a transaction and protect buyers from the largest unexpected fees. And then there are tier-two contingencies, like a homeowners association clause that can help you pull out of a transaction if there are unanticipated rules (like not being able to paint your house a certain color).

The bottom line: Keep your offer shielded from the unpredictable and you’ll be able to walk away from the deal without losing any money. But in a hot market with multiple offers, consider removing the less important ones. Here are four important contingencies to keep in your offer, and arguably the most important one below.

4 Important Contingencies You Should Never Remove

  • Inspection contingency

    A home inspection contingency — strongly recommended by most real estate agents — specifies that you will get a licensed home inspector to check the property within a specified period (typically seven days) after you sign the purchase agreement. Once the inspection is complete, you’re allowed to request that the seller makes repairs, and it’s up to you to decide what repairs you request. The seller then has the option to make the repairs or counter. If an agreement can’t be reached, buyers can back out of their purchase with their earnest money deposit intact.

  • Financing contingency

    This clause states that your offer on the property is contingent on being able to secure financing. The main goal of a financing contingency is to ensure that if you can’t obtain a loan, you’ll be able to get your earnest money deposit back. The clause specifies that you have a certain number of days within which to get your mortgage approved by your lender. Many lenders recommend homebuyers allow for up to 14 days.

  • House-sale contingency

    Many buyers need the equity in their current home to purchase a new one. This contingency means that if the sale of a buyer’s current home falls through, so will the sale of the home the buyer wants to purchase. Including a prior-sale contingency in the contract for your new home provides an opportunity to withdraw the offer if your existing home does not sell by a certain date. If you need to sell an existing home before you buy a new one, it’s certainly an option to consider; however, be warned that it’s also one that has been known to scare away sellers.

  • We saved the most important for last: The appraisal contingency

    This contingency is arguably the most important because it could save you up to tens of thousands of dollars. Typically, when you buy a house, you put in an offer, and if the seller accepts it, your lender orders an appraisal. But if the appraisal comes in lower than the price you agreed to pay, you’ll have some decisions to make — mainly how to make up the difference in the home price and the loan amount. You’ll have more options if you’ve included an appraisal contingency. Such a contingency usually stipulates that the appraisal must come in within 5% or 10% of the sale price, or sometimes even at or above the sale price. You can try to negotiate with the seller to meet you halfway, but with this contingency, it’s your call to determine whether you’re overpaying for the property and want to back out.

Have any contingencies you included in a real estate contract helped protect you in an important way? Share your experience in the comments so we can celebrate your expertise in the future.

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