A contingency is a task or step in the real estate transaction that must be completed or satisfied until the deal can finalize. There are very common contingencies that typically go with just about every real estate transaction, however, in today's really tough market, a lot of buyers are waiving all of those contingencies, which can be a smart move yet a risky one. It's important to understand the contingencies before agreeing to neglect one or including it with your offer. Here are the four most common contingencies in real estate offer.
#1. Home inspections.
The home inspection is probably the most common and well-known. As soon as an offer is accepted by the seller, the buyer typically has 7 to 10 days to schedule a home inspection. This is an unbiased look at the entire property and structural integrity of the home to determine if there are any underlying issues or obvious problems. Many buyers are considering waiving this right now and will choose to buy the home regardless, however, this can be risky and I always recommend having a home inspection completed regardless even after you close on the deal. This will tell you as much as you can know about the property to help you plan for the future.
The home inspection report is then issued to the seller with one of several responses from the buyer; the buyer can accept the inspection as is and move on to closing, the buyer can request the seller take money off of the deal to compensate for issues that might arise in the future, agree to fix certain said issues, or the seller can counter offer until an agreement is made. If no agreement can be made on the home inspection contingency, the deal typically terminates.
#2. Financing.
This is another risky contingency that a lot of buyers are waiving right now because they might have the excess cash to back up their offer. If a buyer is financing the entire purchase of the home and something falls through with the financing, the buyer is technically "off the hook" from the legal obligation to buy the property. The seller then will need to put the listing back on the market. Most buyers will verify that they are well approved before even making an offer so financing contingencies don't typically terminate the deal unless the buyer does something drastic to their finances between approval and closing. This could mean anywhere from buying a car, losing their job, getting into debt, or blowing all of their cash reserves so they have no money for closing costs or a down payment.
#3. Appraisals.
Again, in today's market, many buyers are waiving the appraisal regardless of what the home will appraise for. This means that if the appraisal comes in lower than the offer, the buyer will still agree to pay for the home at the offer price. They may need to make up the difference between the appraisal amount and the offer amount, which means that immediately upon closing, the buyer has negative equity. However, in hot seller's markets, real estate prices and values are going up all the time so it shouldn't take long for the value to meet the appraisal.
#4. The sale of a current home.
This is it for every buyer because some buyers don't need to sell a home before being able to buy another one. However, this common contingency is based on whether or not the buyer successfully sells their current home and is typically called a "chain of sale" clause. They are based on a certain timeframe, typically 30 to 60 days and if the home doesn't sell, the contract is terminated. In a buyers market, this contingency is more feasible but if you're trying to buy a house in a competitive seller's market, it's going to make it difficult to compete with other buyers that may not have to sell another home.
For more information on contingencies when buying or selling a home or if you'd like information about the Palm Desert real estate market, don't hesitate to call our office at any time.
More Tips for Home Buyers:
How Much Money do I Need to Buy a Home?
Can I Compete with an All-Cash Offer?
What Should I Expect When Purchasing an Older Home
Issues with Placing an Offer Too Soon