Common Home Buying Contingencies Explained
Purchasing a home can bring some uncertainty. It’s a large purchase involving many parties, after all. Therefore, contingencies can be put in place to protect home buyers. These allow buyers to back out of purchasing the home if something goes awry.
We’ll explore contingencies in more detail, including identifying the most common types of contingencies for buyers, how they work, the pros and cons, and what it means to waive them.
What do contingencies mean when buying a home?
A prospective home buyer will make a contingent offer to a seller that certain conditions must be met before the sale is completed. Contingencies often relate to issues like inspections, financing, insurance, and appraisals. A standard home purchase contract will spell them out, and the home buyers can then choose to include them or not.
Think of contingencies as an escape hatch. For example, if you don’t get the mortgage you were expecting, discoveries are made on the home, or uncontrollable events take place, contingencies allow one party or the other to back out of the deal, returning the buyer’s earnest money, if certain conditions are not met.
However, because you have this escape hatch, your offer may be less attractive to the seller. Especially in red-hot housing markets where sellers receive multiple bids and buyers waive certain contingencies.
Common types of contingencies in a home purcase
Contract contingencies are common in real estate transactions. Following are some of the most common types of home contingencies co-buy groups should know about.
🔨 Home inspection contingency
Home inspection contingencies are the most common and occur in most home sales. If a home inspection contingency is included in the contract, the buyer’s offer can be voided if the inspection turns up problems with the home that the buyer was not aware of at the time of the offer and when the buyer and seller are unable or unwilling to negotiate over or repair.
📝 Title contingency
The title search process allows both the buyer and seller to ensure that the seller has a clear title to the property being sold. Title defects can occur, such as unsettled tax or mechanics liens, unknown heirs, or unclear distributions in bankruptcy. If a title contingency is present, the discovery of a defect on the title allows the buyer to back out of the contract without penalty if the attorneys or title company cannot resolve the defect.
💵 Financing contingency
A financing contingency occurs when the buyer’s offer is made contingent on the ability to obtain financing from a lender. If a buyer cannot finalize a mortgage agreement, the financing contingency allows for the cancelation of the offer without the buyer losing earnest money.
🏠 Appraisal contingency
A lender’s appraisal is a professional opinion of a home’s value. The appraisal confirms that a home is worth the money the lender is lending to the homebuyer.
When a home appraises for less than the offer amount, financing may fall through, or buyers may have to put more money down to buy the property. A property appraisal contingency lets buyers back out if the appraisal comes in low.
🥳 Home sale contingency
Many buyers need to sell their current home to afford to buy their next home. This is the idea behind home sale contingencies, where they do not have to finalize the contract of sale until their current home sells.
When sellers receive identical offers, one with a home sale contingency and one without, sellers typically choose the non-contingent offer.
You’re likely to encounter other contingencies, but these are some of the most common.
What is means to waive contingencies
When you buy a home, one of the decisions you’ll have to make is whether or not to waive your contingencies. Contingencies are clauses in an offer that allow you to back out of the deal for a specific reason. If you waive contingencies, it means as the buyer you are agreeing to purchase the home without certain conditions.
Pros of waiving contingencies
In a competitive real estate market, reducing or entirely waiving contingencies can often be the difference between winning and losing a home in a multi-offer situation. Your offer will be more attractive to a seller. In short, from the seller’s perspective, an agreement with fewer contingencies is more likely to be completed.
This is how buyers can compete against all-cash offers or offers higher in price.
Cons of waiving contingencies
As a homebuyer, you should weigh the risks of waiving contingencies and determine your risk tolerance. Do the benefits outweigh the risks for you in your situation?
While reducing or waiving contingencies can be an effective strategy for winning in a multiple offer situation, there are risks. For instance, if you waive an inspection contingency, you could later uncover something affecting property value like a crack in the foundation or termite infestation. Without an inspection contingency in place, the buyer is contractually obligated to purchase the property. This may mean your group needs to spend thousands of dollars more than anticipated.
Whether to keep or waive contingencies is a decision unique to your group’s situation. Discuss the risks and benefits with both your co-buy group and your real estate agent before deciding.
Nestment, Inc. does not guarantee and is in no way responsible for the accuracy of information provided in this blog post. All information is provided “AS IS” and with all faults. Data presented here may not reflect all real estate activity in the market. While the information on this site is about legal and tax issues, it is not intended as legal or tax advice or as a substitute for the particularized advice of your own attorney and tax professional.