Seven Powerful Contingencies – Make Offers, Control Real Estate, Eliminate Risks
Contingencies refer to provisions added to real estate contracts that allow the parties— either buyer or seller, to escape the legal obligation to honor the contract if the person/property fails to meet certain conditions, events or representations.
From the buyer’s perspective, contingencies give them more time to investigate properties and answer questions without the concern that a competitor will swoop in and buy the property.
For example, suppose you find a fantastic home for your personal residence or an incredible deal on a piece of investment real estate. The property fits your basic criteria—location in a desirable neighborhood, good condition and a price below the market value of similar properties in the area.
In a sellers’ market, you need to move quickly to bring the property under your control. If you wait to submit your offer after you complete your due diligence, which may include a title check, home inspection and verification of proper permits for remodeling work completed, you could lose the property to another buyer.
Contingencies allow you to submit an offer to gain control of the home while you conduct a more thorough investigation of the property to make sure you want to conclude the purchase. Contingencies provides you ways to back out of the deal without losing your earnest money if you determine not everything about the property is what was initially projected.
Following are seven of the most common contingencies used by real estate buyers:
1) Financing Contingency:
Usually real estate buyers who intend to obtain mortgage financing to purchase real estate add a financing contingency to the contract. This clause informs the seller that you will try to obtain a certain type of loan, such as VA or FHA-insured mortgage, for a specific percentage of the purchase price (usually 80 percent) by a certain date after execution of the contract. The provision protects you from having to accept loan terms other than the parameters outlined in the offer.
2) Inspection Contingency:
The inspection contingency allows for a minimum of one inspection. Most inspection contingencies allow you to conduct for a number of inspections, including general inspection, lead paint testing, mold, radon, termites and inspection for other hazardous conditions. You can nullify the contract if not satisfied with the condition of the home, require the seller to make repairs or renegotiate the price.
For new construction, buyers add an inspection contingency, which allows an inspection at specific stages of the construction process to verify compliance with quality and contract specifications.
3) Appraisal Contingency:
Real estate buyers add appraisal contingencies in case a property’s appraised value comes in less than the offer price. For example, if you offer $550,000, based on a down payment of ten percent ($55,000) you will need to secure a mortgage for $495,000. If the property appraises for $530, 000, and the lender will finance only 90 percent of the appraised value—$477, 000, you will have to put an extra $18,000 to close the deal.
An appraisal contingency requires the appraised price to equal or exceed the offer price or you can cancel the transaction without incurring a financial penalty. Cash buyers insert an appraisal contingency in case the property fails to appraise for the price they agreed to pay.
4) Home Sale Contingency:
If you find a home you would like to purchase, but need to sell your existing residence to have the funds to close the deal, make your offer dependent on the sale of your existing home. This contingency allows you to receive a return of earnest money if you can’t sell your home within a certain period.
Often, sellers will counteroffer a home sale contingency with a “kick-out” provision. This clause allows the seller to keep the property on the market and accept a viable offer if the first buyer cannot close on the existing home sale by a specified date. In a sellers’ market, a contract that contains a home sale contingency will likely result in immediate elimination by the seller.
5) Title Contingency:
Title contingencies allow buyers to walk away from a deal when the seller cannot provide a clear title to the property. Typical title problems include liens, land easements or title disputes. The title contingency allows a reputable title insurance company to conduct a title search of the subject property to ensure the seller receives full ownership rights at the closing.
6) Document Review Contingency:
Many state statutes permit buyers to cancel contracts for condominiums after reviewing financials, bylaws and regulations. Buyers routinely add contingencies dependent on documents review by their attorney CPA or other professional.
7) Insurance Contingency:
Insurance contingencies allow buyers to back out of a contract if unable to obtain insurance coverage at or below a certain dollar amount.
Buyers can make offers and write contingencies to cover just about any uncertainty without taking on financial risk. However, it does not mean the seller will accept the contingency. Sellers want to minimize the time they take a property off the market. Sellers want fast assurance that they have a “doable” deal. Therefore, most sellers want contingencies removed within a certain period, such as within ten days after both parties sign the contract. You should use contingencies as tools for your financial protection while you perform due diligence, as oppose to employing contingencies as loopholes for backing out of offers.
Guest Post by: John B Landers has more than 15 years of practical experience in the private/public housing and construction industries as a manager, business owner and real estate investor. As a freelance writer for the past six years, he researches and writes content on a variety of subject matters, including the economy, real estate, foreclosures, home improvements and consumer finance.
John also has a Bachelor’s degree in Business Administration with a minor in economics. Visit Free Foreclosure Database.com website for news and practical tips on foreclosure investing and free unlimited access to foreclosed homes listings.
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Great post and very good job of covering the bases. For consumers, I recommend asking your agent for blank copies of the purchase agreement and all common contingency forms before even looking at homes. Read them over and ask questions. This ensures you to be prepared and knowledgeable to act quickly once you find the home you REALLY want!
Shawn Hartmann recently posted..Twin Cities Lake Living Starting at $35,000 | See them all!
Great tip Shawn! Thanks for stopping by.