How Do Contingencies Work?

    couple discussing papers with agentA contingency in a legal agreement states that certain elements must be in place, or that certain tasks be completed, before a contract becomes valid. In real estate, the buyer, seller, or both can apply contingencies to financing, appraisals, inspections, and other conditions. Another example of a common contingency would be the buyer agrees to purchase the seller’s property only if the buyer sells their existing property first. The contract between buyer and seller would state that the purchase of the seller’s house is contingent on the sale of the buyer’s current house.

    The buyer and the seller, to allow room for negotiations in the contract, agree upon contingencies, and the dates by which they must be completed. Those contingencies must be completed, or renegotiated in writing, by the stated dates prior to finalizing the contract and closing on the property.

    A contingency on the home’s appraisal and inspection are imperative. Let’s say a buyer agrees to buy a seller’s property for the hypothetical number of $350,000. But when the lenders have the property appraised, it’s only valued at $250,000. That difference in property value could cancel the contract, or allow legal “elbow-room” to negotiate the price to meet appraisal value. The same is true with contingencies on home inspections. In the same hypothetical scenario, the buyer agrees to purchase a house for which the seller is asking $350,000. However, the home inspection reveals damage to the roof, faulty wiring, leaks in plumbing, and, to top it all off, termites. The cost of repairs and pest control will lower the value of the property.

    The buyer has several choices.

    1. Request that repairs be made prior to close.
    2. Have the seller reduce the price of the property to allow the buyer to pay for repairs.
    3. Back out of the contract all together.

    A less common but increasingly important contingency a buyer can request in a contract is that the sale of the home is contingent on the buyer’s ability to obtain homeowner’s insurance. In certain situations, such as location of the home (as in flood zones), or prior insurance claims against a property, the house becomes un-insurable. This could be extremely problematic for the buyer who, then, is unable to insure their investment.

    3 people discussing paperworkMany contingencies, such as financing, appraisal, inspection, and closing dates are already woven into the contract provided by the real estate agent. However, you can request any contingency you choose in your offer, and if the seller accepts that offer, those contingencies will be added to your contract. However, the seller may decline an offer based solely on the contingencies you’ve requested.

    For example, two offers come in on a home at the same time. Offer A has no contingencies outside of the norm. Offer B has the normal contingencies, but also includes the contingency on selling their existing property first. In most cases, the seller will accept offer A, with normal contingencies because Offer B could be problematic and ultimately, could fall through. Some sellers are motivated by time, meaning they need to move quickly. Time consuming contingencies could cause them to decline your offer. Remember the power of negotiation and counter-offers.

    Buying a house is a huge investment. When you purchase some items, such as clothing or electronics, you have the option to return those products within a specific amount of time if you’re displeased. Real estate does not afford that luxury. Once you’ve committed and the closing process is finished, you’re the owner of that property and cannot return it. Your only option is to learn to love it, or list it for sale.

    There are certain things you can do in advance, as the buyer, to expedite completion of seller contingencies, such as being pre-approved for your home mortgage loan. Pre-approval lets the seller know you’re a serious buyer, and that they’re not going to have to wait out a lengthy application process on your part that may ultimately be denied.

    The Vining Group Realty will be able to advise you on contingencies, such as those you need and those that may negatively affect your offer. View your contracts carefully and ask us to explain any items you don’t understand. Give us a call at 704-258-3117.

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