I like to say real estate contingency clauses are buyers and sellers safety nets. A more formal explanation would be “A contingent offer is standard and it means an offer on a home has been made and the seller has accepted it, but the finalized sale is contingent upon certain criteria that has to be met (Colley 2014).”
In this article I decided to focus on buyer’s contingencies. I always explain to my clients that contingencies are placed into almost all real estate purchase agreements because they give you an exit strategy without the forfeiture of your initial good faith deposit. As a buyer a contingency should be strong enough to protect your interests yet not so onerous as to discourage a seller from accepting your offer.
The three main buyer contingencies that are commonly used in purchase agreements are inspection, appraisal and loan.
Your inspection contingency is one of the first contingencies addressed in the purchase agreement. I advise my clients to keep the inspection contingency period between 7-10 days after acceptance. This small window of time gives you the opportunity to discover the property’s physical condition. As mentioned in my previous article dated Sept. 14th 2016, “Why a home inspection is necessary,” “A general real estate inspection report provides written documentation of material defects discovered in the inspected building’s systems and components which, in the opinion of the Inspector, are safety hazards, are not functioning properly, or appear to be at the ends of their service life (LaRocca 2014).”
As a matter of fact, if at the end of your inspection contingency period you discover you no longer want to move forward with your purchase you can cancel escrow and request that your initial good faith deposit be returned. Keep in mind the money that you paid for your inspections is non-refundable. It is equally important to remember if you need additional time to complete your inspections a written request should be communicated to the seller’s agent. Under no circumstances should there be any verbal agreements.
Finally, if you decided to proceed with your purchase the inspection contingency should be removed in writing. When you remove your inspection contingency you are agreeing that you have completed all your physical inspections to your satisfaction. An important point to remember is when you remove the inspection contingency you cannot request your initial good faith deposit returned based on the property’s condition.
I always advise my clients to include a 17 day appraisal contingency in the purchase agreement because it protects your initial good faith deposit in case the property appraises for less than the purchase price. If the appraised value is less than the purchase price you have a few options. You can ask the seller to lower the price to the appraised value, pay the difference between the purchase price and the appraised value or cancel the contract and request the return of your initial good faith deposit.
Additionally, to minimize the risk of a property not appraising for the purchase price I always research and complete a detailed market analysis which includes market comparables (Comps). Real estate comps are properties that have sold within the last 6 months and are similar to the subject property in regards to year built, square footage, location and property condition. Once my market analysis is complete and my clients are comfortable with the details I proceed with structuring an offer that is in line with market value.
Obtaining a loan is where a buyer is the most vulnerable in the purchase agreement. Even though the standard time frame for a loan contingency is 17 days I strategically make a point to keep it in effect for the duration of the transaction to protect my client’s initial good faith deposit.
Furthermore, in my experience obtaining final loan approval does not mean the loan will fund. In fact, once your loan has made it to underwriting additional documentation can still be requested and if the documentation cannot be provided the loan will not fund and the deal can fall apart. This is why it is important not to remove the loan contingency because if you do you have a higher risk of forfeiting your initial good faith deposit.
As a final point, understanding how to get the most out of contingencies takes skill, practice and knowledge. It is important that you work with an experienced realtor that can navigate through the contingency process without jeopardizing your initial good faith deposit.
Written by: Yvette C. Page