Contingencies in Real Estate: What are they, and how do they work?

Contingencies are one of the most powerful things in the real estate world today.  Call them the poker chips of home buying and selling.  Some folks are “all in” and some are “all out”.  What does this mean??

The Real Estate market in the San Ramon Valley has become fast and furious in the past several months.  Add together crazy high demand with historical low inventory, and you get a very interesting mix.  Folks are becoming very competitive, and are using contingencies as the tool for winning the bid on the house they want.

Contingencies are written into most real estate contracts as insurance for the buyer.   When an offer is made to purchase real estate, every buyer is given the opportunity to fully investigate the property and its condition, prior to purchase. Buyers are also given time to get a commitment from a lender for the purchase, as well as a confirmation, through an appraisal, that the property is worth what has been offered

Contingencies are conditions that need to be met for a contract to remain valid. A contingency is a condition. In other words, you are making an offer to buy a home provided certain conditions are met.  Once all contingencies have been removed, the buyer has committed an earnest money deposit and agrees to fulfill the terms    of the purchase contract they’ve signed. If the buyer backs out after removing all of the contingencies, the seller has the right to go after the deposit. Therefore, it is advisable to be completely satisfied and ready to move forward before signing the contingency removal documents.

In today’s real estate transactions, below are the most common contingencies:

Appraisal.  Appraisal contingencies mean that the buyer can get out of the contract and get a refund of their deposit if the property does not appraise for the purchase/offer price. If the appraisal comes in at less than offer value, the seller either must reduce the price for the buyer, the buyer must come up with the difference in cash to secure the loan, or cancel the contract. If the buyer has written an offer with no appraisal or loan contingency, their deposit could be at risk if they decide to cancel the contract.  

Inspection This one gives the buyer a certain time period to conduct inspections on the property and, once the results are in, the buyer should be satisfied and comfortable with the condition of the home. This gives the buyer the option to back out should the necessary repairs exceed a certain dollar amount or percentage of the purchase price. Nowadays, most properties are sold “as-is”.

Loan   This one makes the contract contingent on the buyer’s ability to obtain financing at a certain loan-to-value, interest rate and term. If not, the buyer may cancel, and if the buyer can’t provide proof of a mortgage/loan commitment within a certain time period, the seller can refuse the buyer.  In other words, the buyer will buy the place, provided they can get a loan to finance the purchase price of the home. This contingency allows you to back out without penalty if the bank does not grant the loan.

Because price does represent a limit for most buyers, “no contingencies” becomes a way to sweeten the offer without driving the price higher. One strategy to win is to bid up the price and then re-negotiate the price once the appraisal comes in and determines the value. However, the appraisal is the lender’s reference of market value. “Market value” is what most sellers hope to sell for and what most buyers are willing to pay. A seller “counters” back on an offer(s) to remove contingency periods to reduce the risk of the buyer backing out of the offer and delaying the sales process.  (Deciding to remove the appraisal and loan contingency from the   offer on a home can occur because the buyer is purchasing with all cash.)

A buyer applies contingency periods to reduce the risk of losing their good faith deposit if the offer changes based on condition or value. In some cases the risk is worth it, and in others the risk is too high.  Each buyer’s situation is different. Before writing an offer with no contingency periods, be sure you understand the whole picture.  Knowing what the risks entail is the best way to decide how aggressive your offer can be and what the consequences could be if it all goes awry.

 Be sure you have a qualified and knowledgeable Realtor on your side.  Call, text or email us today.  We are armed with the tools and advice you need to help you find the home that’s right for you!