Contingencies are those, sometimes pesky conditions listed in your purchase contract. These are conditions that must be fulfilled, relating to inspections, financing, insurance and the like. Your property purchase will be dependent on these contingencies being met.
For you, the buyer, contingencies form the escape hatch if your financing falls through, some uncontrollable event occurs or a discovery blocks conclusion of the deal. You’re not buying a rug you can return if your wife doesn’t like the color. Once your property purchase is final, the deal is done and there’s no turning back.
Contingencies are included in the written purchase contract at the behest of the buyer and seller. In the weeks between signing the contract and closing – the escrow period – you and the seller will work toward removing or meeting these conditions. Both seller and buyer are responsible to keep the other up to date with the progress.
When and where
You, the buyer, signs a purchase agreement with the seller. This contract is a vital document in the purchase process and contingencies form a vital part of it. A standard house purchase contract is likely to have many of these contingencies already listed so all you have to do is check the boxes. Most standard contingencies are there to protect the signatories and it would possibly be foolish to reject them.
These conditions are designed to protect both buyer and seller; e.g. a financing contingency places the responsibility for the sale on the buyer, getting financing to purchase the house.
Conversely, a buyer’s inspection contingency means the sale will finalize only on the buyer receiving and being happy with the result of reports from inspectors they have hired.
The four most common contingencies found on standard purchase agreement are explained below:
A home inspection contingency is one of the most common types of purchase contract conditions. It’s understandable, a home inspection can reveal all kinds of problems such as a serious crack in the foundation.
Your contract may specify that the seller does the repairs or you can renegotiate the deal or cancel. This is a time-sensitive issue; you have just a few days to decide after the inspection is done, so it’s important to act quickly.
Your finance company is going to want to know that the purchase price and the value of the property match, to determine the amount of the approved loan. If the appraisal is less than the purchase price, the loan could be refused. Having a home appraisal contingency gives you choices; renegotiate the price in light of the appraisal, or walk away.
A financing contingency usually allows you to walk away with your deposit intact should you fail to get final approval for a mortgage to cover the purchase price. This condition is there, should the financing application be unsuccessful and the buyer needs a way out of the contract. Since this contingency expires before closing, make sure financing is finalized well before the time.
Sale of home
If you’re a homeowner trying to sell a house and buy another, you can add in a condition for the sale of your present home. You can then put the new property under contract while trying to sell your current home. On the other hand, if you don’t sell your home, you may be able to get out of the purchase. The point up to which you can walk away must be included in the contract and the two parties must agree.
Unsurprisingly, sellers are not enthusiastic about this type of offer, and naturally will only accept this type of condition as a last resort. In a competitive market when inventory is low, this kind of purchase contract contingency can work against the buyer. Backing out of the deal because you current home hasn’t sold may mean you will forfeit your original deposit.
Put your contingencies in writing, most likely as part of your offer on the house, or as part of the contract that you and the seller agree on.
Although you may be able to walk away from a deal, it’s a serious decision and brings you no closer to your homeownership goals. It’s best to do your due diligence, thoroughly study your would-be home, and rethink your needs before entering into an agreement that can lead to “buyer’s remorse.”