Buyer’s Guide to Contingencies

You’ve probably heard of “contingencies” in a real estate transaction, but if you haven’t purchased or sold a home, you may not know what it means. In simple terms, a contingency is a way for the buyer to get out of contract on a home without putting their earnest money deposit (EMD) at risk while they do their due diligence. The EMD is typically 3% of the purchase price, which is deposited into escrow within a few days of your offer being accepted. Per the contract, if you fall out of contract without contingencies in place, the seller can keep the deposit. 

Contingencies benefit the buyer, and stress out the seller! In a competitive market, most of the winning offers are non-contingent, or have very few contingencies. When you’re deciding on the terms of your offer, you have to strike a balance between protecting your money and writing a strong offer. This is always done on a case by case basis, and I work closely with my clients to help them make a decision they’re comfortable with. 

Here is a breakdown of the Top 4 Most Common Contingencies:

Financing: 

• This contingency says that if you cannot get a loan for $X for a (30y fixed | ARM) with an interest rate of X.XXX% or better, you can get out of the contract and get your EMD back. I fill in the price, loan rate, and loan type in the Purchase Agreement. 
• If you are fully underwritten and the lender feels confident in your ability to obtain the loan, many buyers will waive their financing contingency in order to make their offer more attractive to the seller. This is why it’s SO important to work with a local, reputable, and experienced lender! 

Appraisal

• This contingency says that if the property does not appraise for the purchase price or greater, you can get out of the contract and get your EMD back. If you are writing within the range of comparable properties, you probably don’t need to stress about the property appraising. 

Disclosures

• Disclosures are the important property-specific documents like inspections, environmental hazard report, seller-completed questionnaires, etc. The Purchase Agreement gives you 17 days, by default, to review and approval all disclosures.
• Strong offers will have the disclosures read and approved in advance, after all questions are answered. 

Inspections

• This is the most impactful contingency. An inspection contingency, typically about 7-10 days, allows you to do ANY and ALL inspections. You can literally get out of the contract and get your money back for ANY reason. You don’t even have to explain it. That’s why sellers hate this contingency, because it’s a big risk for them. This is why many listing agents have inspections done on the property before they put it on the market. In the current market, most buyers will write an offer without an inspection contingency on a property that has inspection reports in the disclosure package. Whether or not you feel comfortable doing that, is up to you. If you do not have an inspection contingency, you are taking the property as it is now, even if there are things you didn’t notice.

Contingencies aren’t limited to these four listed above. There is also sort of a “choose your own adventure” contingency that we may need to create for unique situations. Here are some fun examples of contingencies I’ve had to use in the past:

• A functioning furnace must be installed before closing.

• The unwarranted room must be removed, at the sellers expense.

• And last but not least, the fire insurance policy can’t be higher than $10k/year. 

If you have any additional questions about contingencies, or home buying in general, I’m always available and happy to chat! Drop me an email or give me a call – krolph@equitylegacy.com or 916-292-2207

Whether you’re buying or selling in Granite Bay or Loomis, I’ll make sure you have a competitive edge.