The Common Contingencies in Real Estate

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What Are Typical Home Buying Contingencies?

When buying a home the current real estate market will dictate some of your decisions. For example, when you've found a home you love, you'll ask your real estate agent to craft an offer.

The current real estate market will often shape your decisions on what "contingencies" to include in the contract.

If it is a buyer's market, you will have a significant amount of latitude on what you put in your offer to purchase.

On the other hand, if it is a hot seller's market, you will be much more limited in the real estate contingencies you can include.

A contingency clause allows either party to back out of a real estate contract if certain specified conditions are not met.

Let's look at some of the most common contingencies in real estate, so you can decide if any of them make sense for the current market.

We will cover the following contingencies in detail - the home inspection, appraisal, financing and home sale.

All or none of the contingencies could be found in a real estate agreement.

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Common Real Estate ContingenciesDeposit Photos

The Home Inspection Contingency

A home inspection contingency afford the buyer the opportunity to hire a professional home inspector who will look over the property in detail.

The inspection contingency language will state how long the buyer has to complete the property inspection. The clause will also spell out how quickly they need to respond to the seller with the results.

Sometimes there is a dollar amount included that states the problems found need to be more than the specified figure.

Negotiations for home inspections between the buyer and seller are quite common in buyer's markets. In seller's markets, buyers often waive the home inspection contingency or are reluctant to ask the seller for concessions.

The home inspection is the most common reason why a home will come back on the market.

The Appraisal Contingency

An appraisal contingency in an offer to purchase states that if the property does not appraise for at least the suggested sale price, then the contract can be voided.

Appraisal contingencies protect both the home buyer and the mortgage lender. Lenders do not want to loan to borrowers more money than a home is worth.

Buyers of course don't want to purchase a home for more that the value. An appraisal contingency clause is also common in buyer's markets and much less so in seller's markets.

In fact, it is not unusual for a buyer to either waive the home inspection or to add appraisal gap language in the contract.

An appraisal gap clause will state that the buyer will make up the difference if the home appraisal comes in low.

In seller's markets this language is included because buyers want to make their offers more attractive when there are bidding wars.

The Mortgage Contingency Clause

A financing contingency states that the buyer will have a specific amount of time to procure financing. The mortgage contingency time frame is usually somewhere between four to six weeks from the time of the offer.

The mortgage clause will also state how much money the buyer is looking to borrow and what type of mortgage they will be getting. For example, it could be conventional or FHA financing.

When a buyer is not able to get financed by the specified date, they will need to notify the seller in writing for either an extension or that they were not successful.

If a buyer fails to notify the seller in writing by the agreed-upon date in any of these contingencies that the clause is no longer in force.

When the buyer fails to notify as required, they are open to losing their earnest money if they back out of the sale.

Once a buyer has received their financing commitment, they will often move the sale from contingent to pending status in the multiple listing service.

The Home Sale Contingency

Most buyers are not able to purchase a home without selling their existing property. This is why most potential buyers will get their current home under contract first.

Home sale contingencies give the buyer the right to sell their current home in order to move forward with their purchase.

Most home sellers will not accept a home sale contingency even in buyer's markets. It is the least desirable contingencies because seller's lose control over the process.

What Happens When Contingencies Are Not Completed?

When a contingency is not completed in the specified time frame the buyer and seller can agree to extend. It is also possible that either the buyer or seller may not wish to continue and can terminate the sale.

When this happens the deposit will follow the party who is entitled to receive it. If the buyers have followed the contract terms, they will get their money back.

If the contract terms have not been followed, the seller will be entitled to keep the earnest money.

Final Thoughts on Contingencies

Whether or not contingencies are included in the contract will often be determined by the current local real estate market.

A contingency can protect both the home buyer and seller in the event that a deal falls through.

If a buyer makes an offer that is contingent on too many conditions, the seller may not be as interested. This is especially true when multiple offers are involved.

When drafting a contract, it is important to consider which contingencies should be included and the specific terms involved.

An excellent real estate agent will be able to advise which contingencies are likely to be accepted in the current real estate market.

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Bill Gassett is an avid writer for numerous real estate topics including finance, mortgages, moving, home improvement, and general real estate. His work has been featured on numerous prestigious real estate publications.

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