Understanding the Concept of Contingency in Real Estate

Understanding the Concept of Contingency in Real Estate

When you're in the process of buying or selling a home, it's essential to understand the various terms and conditions that may come into play. One concept you may encounter is "contingency," which refers to a set of conditions that must be met before a real estate transaction can be finalized. In this article, we'll explore the concept of contingency in real estate and how it can affect the buying or selling process.

What is a contingent offer?

A contingent offer is a proposed purchase of a property that is contingent, or dependent, on certain conditions being met before the sale can be completed. These conditions, known as contingencies, can pertain to the property itself, the financing for the property, or the sale of the buyer's current home.

For instance, a buyer might make a contingent offer on a property with the condition that their financing is approved before the sale can be finalized. This protects the buyer in case they are unable to obtain a mortgage for the property. Another example could be a contingency requiring the successful completion of a home inspection before the sale can be finalized. This gives the buyer the chance to identify any potential problems or repairs that need to be made, and to negotiate with the seller for repairs or credits.

If the contingencies listed in the offer are not met, the buyer has the right to back out of the deal without any financial penalty.

On the other hand, if the contingencies are met, the offer becomes a binding contract and the sale can proceed.

 

Understand The Type Of Contingencies In Real Estate

There are several types of contingencies that a buyer might include in an offer, depending on their needs and circumstances. Some common contingencies include:

Financing contingency:

This type of contingency requires that financing be approved before the sale can be completed. This is important for buyers who need to secure a mortgage in order to purchase the property. If the financing falls through, the buyer can back out of the deal without penalty.

Home inspection contingency:

A home inspection contingency allows the buyer to have a professional inspection of the property before the sale is finalized. This gives the buyer the opportunity to identify any potential issues or repairs that need to be made, and to negotiate with the seller for repairs or credits.

Appraisal contingency:

An appraisal contingency requires that the property be appraised at or above the agreed upon purchase price before the sale can be completed. If the appraisal comes in below the purchase price, the buyer has the option to renegotiate the price or back out of the deal.

Sale of buyer's current home contingency:

This type of contingency requires that the buyer's current home be sold before the purchase of the new property can be completed. This protects the buyer in case they are unable to sell their current home and need to back out of the deal.

Title contingency:

A title contingency requires that the seller provide clear title to the property before the sale can be completed. This protects the buyer from any potential issues with the ownership of the property.

Zoning contingency:

A zoning contingency requires that the property be zoned for the buyer's intended use before the sale can be completed. This is important for buyers who plan to use the property for a specific purpose, such as running a business.

Environmental contingency:

An environmental contingency requires that the property be free of any environmental hazards or contamination before the sale can be completed. This can include things like lead paint, asbestos, or underground storage tanks.

Three Most Common Contingencies In Real Estate

Financing contingency:

This type of contingency requires the approval of financing before the sale of a property can be completed. This is important for buyers who need to secure a mortgage in order to purchase the property. If the financing falls through, the buyer can back out of the deal without penalty.

Home inspection contingency:

A home inspection contingency allows the buyer to have a professional inspection of the property before the sale is finalized. This gives the buyer the opportunity to identify any potential issues or repairs that need to be made, and to negotiate with the seller for repairs or credits.

Appraisal contingency:

An appraisal contingency requires that the property be appraised at or above the agreed upon purchase price before the sale can be completed. If the appraisal comes in below the purchase price, the buyer has the option to renegotiate the price or back out of the deal.

Keep in mind that these are only a few examples of the many contingencies that can be included in a real estate offer. Other common contingencies are listed above. It's important to carefully consider which contingencies you need for your peace of mind and protection, and to work with a real estate agent or attorney to guide you through the contingency process.

Benefits Of Including Contingencies In An Offer

Including contingencies in an offer can provide valuable protections for buyers and allow them to negotiate for certain conditions to be met before the sale is finalized. For example, a home inspection contingency can help buyers identify any potential issues with the property and negotiate for repairs or credits.

A financing contingency can protect buyers in case they are unable to secure a mortgage for the property. However, it's important to be aware that including too many contingencies may make the offer less appealing to the seller, as it adds more conditions and potential obstacles to the sale. It's advisable to carefully consider which contingencies are necessary for your peace of mind and protection, and to work with a real estate agent or attorney to guide you through the contingency process.

Handling Contingencies in Real Estate Transactions

As a seller, it's crucial to carefully review any contingencies in an offer to make sure you are comfortable with the conditions being placed on the sale. If you are not comfortable with a particular contingency, you can try negotiating with the buyer to remove or modify it. If you do agree to a contingency, it's essential to be aware of any deadlines or time frames that are included. If the contingency is not met within the specified time frame, the buyer has the right to back out of the deal.

What Can You Do If The Appraisal Come In Low?

Negotiate With the Seller

If the appraisal for a property you are interested in buying comes in lower than the agreed upon purchase price, you have a few options to consider. You could try negotiating with the seller to lower the price to match the appraisal value.

This option may be feasible if the seller is motivated to sell and willing to compromise. However, if you are not comfortable paying more for the property than it is worth, you might decide to back out of the deal entirely. If you have a financing contingency in your offer, you can use the low appraisal as a reason to cancel the sale without any financial penalty.

Seond Appraisal

Alternatively, you could consider getting a second appraisal to see if it comes in higher than the first. However, keep in mind that there is a chance that the second appraisal could also come in lower than the agreed upon purchase price, which could create additional problems.

If you have the financial means and are still interested in the property, you could consider paying the difference between the appraisal value and the purchase price in cash. This option is risky, as it means you would be paying more for the property than it is worth.

Cancel the deal:

If you are not willing to pay more than the property is worth, you may decide to cancel the transaction. If you included a financing contingency in your offer, you can use this as a justification for canceling the deal without any financial consequences.

Finally, if you believe the low appraisal was due to a mistake or oversight on the part of the lender, you could try asking them to reconsider the appraisal value. However, this option is not always successful and there is no guarantee that the lender will change their assessment.

Pay the difference in cash

If you have the cash available and are still interested in purchasing the property, you could consider paying the difference between the appraisal value and the purchase price in cash. This can be a risky move, as it means you would be paying more for the property than it is worth.

Should I Waive The Appraisal Contingency?

As a buyer, waiving the appraisal contingency means that you are agreeing to go through with the purchase of the property even if the appraisal value is lower than the agreed upon price.

This can be a risky decision, as it means you could end up paying more for the property than it is actually worth. There may be certain situations where waiving the appraisal contingency is considered, such as if the housing market is very competitive and you fear losing the property to another buyer. However, it's important to carefully think about the risks and to be certain that you are willing to proceed with the purchase even if the appraisal is lower than anticipated.

If you do decide to waive the contingency, it's a good idea to work with a real estate agent or attorney to fully understand the potential risks and to protect your interests as much as possible. You may also want to negotiate with the seller to agree on a maximum price you are willing to pay in case the appraisal comes in lower than expected.

In general, it's important to carefully consider all contingencies before deciding to waive them. While they can add conditions and potential roadblocks to the sale, they also offer important protections and negotiating power for the buyer. It's a good idea to weigh the potential risks and benefits before making a decision and to work with a professional to ensure your interests are protected.

Contingent Vs. Pending In Real Estate

It's important to understand the distinction between "contingent" and "pending" in real estate. When a property is listed as "pending," it means that the sale is in the process of being finalized, but has not yet been completed. This can involve tasks such as inspections, appraisals, and the signing of documents. "Contingent," on the other hand, means that the sale is dependent on certain conditions being met before it can be finalized.

Once these conditions have been satisfied and the sale becomes "pending," it is no longer considered "contingent."

For example, if a property is listed as "contingent with financing," it means that the sale is dependent on the buyer's financing being approved. If the financing is approved and the sale transitions to "pending," the listing will be updated to reflect this change.

The Role of Contingency in Real Estate Transactions

Contingencies in real estate transactions refer to conditions that must be satisfied before a sale can be finalized. As a buyer, including contingencies in your offer allows you to protect yourself and ensure that certain requirements are met before proceeding with a purchase.

It's important for sellers to carefully review any contingencies in an offer and be aware of any deadlines or time frames. Working with a real estate agent can help you understand and address contingencies during the transaction process.

FAQ - Real Estate Contingencies

What is an appraisal gap clause?

An appraisal gap clause is a provision that is sometimes included in real estate contracts. It specifies what should happen if the appraised value of the property is less than the agreed-upon purchase price. This clause typically gives the buyer the option to either renegotiate the purchase price to match the appraisal value or to walk away from the deal without any financial penalty.

For instance, if the property is being sold for $300,000 but the appraisal comes in at $290,000, the appraisal gap clause would allow the buyer to either request that the seller lower the purchase price to $290,000 or to cancel the deal without penalty.

This clause is included in contracts to protect the buyer in the event that the property appraises for less than the agreed-upon purchase price. This can occur due to market conditions or other factors, and the clause helps the buyer avoid paying more for the property than it is worth.

It's important to note that an appraisal gap clause is not the same as an appraisal contingency, which requires that the property appraise at or above the agreed-upon purchase price before the sale can be completed. An appraisal gap clause only comes into play if the appraisal comes in below the purchase price.

Is it wise to waive the appraisal contingency?

Waiving the appraisal contingency in a real estate transaction can be a risky move, especially if the market is competitive. If you decide to waive this contingency, it's important to work with a real estate agent or attorney to protect your interests and fully understand the potential risks.

You may also want to negotiate with the seller and agree on a maximum price you are willing to pay in the event that the appraisal comes in lower than expected. While including contingencies can add conditions and potential roadblocks to the sale process, they also provide important protections and negotiating power for the buyer.

It's important to carefully consider all contingencies before deciding to waive them, weighing the potential risks and benefits.

Can You Waive An Appraisal Contingency?

As a buyer, you have the option to forgo any contingencies that you have included in your offer to purchase a property. This includes the appraisal contingency, which requires that the property be valued at or above the agreed upon purchase price before the sale can be finalized.

If you choose to waive the appraisal contingency, it means that you agree to proceed with the purchase of the property even if the appraisal comes in lower than the agreed upon purchase price. This can be a risky decision, as it means you may end up paying more for the property than it is actually worth. Before deciding to waive any contingency, it's important to carefully consider the potential risks and benefits.

While waiving contingencies may make your offer more attractive to the seller, it also removes important protections and exposes you to additional risks.

It's a good idea to weigh the pros and cons before making a decision.

Published on 2023-01-08 18:27:07