One one the most common things you’ll find in a real estate offer is a contingency. This post will define what a real estate contingency is and how it works. It will also explain the most common ways contingencies are used in real estate sales.
What Is a Contingency in Real Estate?
In real estate home sales, a contingency refers to a condition that has to be fulfilled prior to the sale of a home. Contingencies are put into place as safety nets for you and your potential buyer.
Contingencies weaken offers, but some of them are necessary. Buyers don't want to put in an offer without an escape hatch if it's needed. Contingencies are usually negotiable — a buyer may offer a higher asking price to compensate for extra contingencies.
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Three Most Common Real Estate Contingencies
There are many types of contingencies in real estate, but these three are the most common.
Home Inspection Contingency
This contingency allows buyers to get the property they intend to purchase inspected prior to fully committing to moving forward. If there's a problem, they can bow out for basically any reason.
This contingency allows buyers to have the property they intend to purchase appraised, which means they have the opportunity to have a home valuation professional come in and determine what the real value of the property is. This contingency both helps the buyer feel secure in the amount of money they’re offering for the home, and it allows the lender to make sure they aren’t overpaying for the property.
This contingency is put into place to protect buyers who must obtain financing to complete their home purchase.
If the lender doesn’t approve their loan, they buyer can back out without penalty.
How Long Do Real Estrate Contingencies Last?
Since earnest money is forfeitable until these contingencies are lifted by the buyer, there has to be a set period of time that a buyer has to meet all the necessary requirements. That period of time is called a contingency period. In a real transaction, the contingency period begins as soon as a seller accepts a potential buyer’s offer.
As an example, in California, the contingency period for inspections and appraisals is typically 17 days. Therefore, if you accept the buyer’s offer on May 1, the contingency removal date would be May 17.
The mortgage contingency has the longest contingency period, and it can last 20 to 60 days.
You have the option to shorten or extend any contingency period in the real estate offer.
What Contingencies Can Cause a Sale to Fall Apart?
If your potential buyer is unable to obtain adequate financing, your home appraises lower than expected or a home inspection reveals some type of major problem that you’re not willing to fix or make a concession on, your buyer has a right to back out of their contract without being penalized.
All that said, there are always pitfalls to backing out of an escrow-in-progress. The biggest one is that it’s a major time setback. Buyers will have to start over with a new transaction, and sellers lose valuable marketing time and have to find another buyer.
What Ends a Contingency Period?
On or before your contingency removal date arrives, your potential buyer must submit a contingency removal form, indicating their desire to proceed with closing and purchase your home.
If this doesn’t happen by the contingency removal date, you have the right to serve your buyer with a notice to perform. Once served, your buyer must either back out of the contract or remove the contingencies and move forward with the sale.
A notice to perform can cause a home sale to fall through, so first try speaking with the buyer's agent to see what's causing the delay. If there's a problem, you may need to re-negotiate some new terms for the sale to happen.
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