Common Contingency Offers
Whether you are buying or selling a home, contingency offers are something you should be familiar with. If you have bought or sold in the past you likely are already familiar but may not realize it. An offer to purchase a home includes things like price, date of closing, date of possession and other terms. The fewer contingencies an offer has, the more attractive it will be for the seller. Most of the time there is some sort of contingency on the sale. This week we will explore the most frequent examples.
- Financing Contingency.
Unless the buyer is paying cash for the house, there will be a financing contingency on the purchase agreement. The contract would basically state that the buyer is willing to purchase the house for a specific price, within a specific date range if the home and the buyer both qualify for a mortgage. The contract would require that the buyer make and good faith effort to secure a loan within a defined timeframe.
- Appraisal Contingency.
Like the financing contingency, if the buyer is not paying cash the purchase agreement will likely include a contingency that the home must appraise for the purchase price or higher. The mortgage lender will only loan a certain percentage of the homes appraised value. If the agreed upon price is much higher than the appraised value, the buyer may be required to have a much larger down payment to make up for the difference. As a result, the agreement is typically contingent upon the appraisal. If the appraisal comes back low, the two parties can re-negotiate the purchase price to bring it more in line with the appraised value.
- Inspection Contingency.
This is another frequent contingency. We always suggest that our buyers get a home inspection from a licensed home inspector. The purchase offer would outline a timeframe for getting inspections and make the agreement contingent on the results of the inspection. After the inspection is completed, repairs may be requested by the buyer if something comes up. At that point the seller can agree, decline or negotiate the repairs, or offer a credit instead of doing repairs. Buyers may agree to an as-is sale if issues on the inspection are not major.
- Home Sale Contingency.
Many buyers need to sell their current home before they can afford to buy their next one. The purchase agreement may include a contingency that the buyers’ current home must sell for the transaction to continue. A good Realtor® would screen these offers by making sure the home is either under contract or is on the market and likely to sell relatively quickly. These contingencies are much less attractive than others because there are outside influences involved. If something happens to prevent the buyers’ home from selling, the transaction could fall through or at very least have a significant delay. It is not uncommon for multiple homes to be linked by several home sale contingencies, a failure on just one of the sales would cause a domino effect. Most of the time everything goes off without a hitch, but it is a risk that is worth keeping in mind.
If you are planning on buying a home in the near future, try limit the number of contingencies as much as possible. We can work with you to explore all options to make the offer as clean as we can. In the market right now, at most price points, sellers can be more particular. In a multiple offer situation, a lower purchase price could possibly win out by having fewer contingencies. Nearly everything in the purchase offer is negotiable. Sellers may request shorter time frames for financing, inspections and home sales in an attempt to limit the damage if a deal falls through due to a contingency. Negotiating these complex situations is one of the biggest reasons for working with an experienced Realtor® when buying or selling a home.
