Contingencies establish requirements/conditions that must be met, or the buyer can walk away from the deal without penalty or loss of earnest money. With a contingency in place, buyers have an extra layer of protection compared to contracts with no contingencies. This is why sellers prefer fewer contingencies when reviewing offers.
Occasionally, a seller can add a contingency to a contract, and this is sometimes known as a “reverse contingency” because it benefits the seller instead of the buyer.
Understanding contingencies and how to use them strategically is a key benefit to working with a professional real estate guide.
Key Takeaways
- Contingencies are a way buyers can protect their earnest money.
- Contingencies state that a particular condition must be met to move forward.
- Common types of contingencies include due diligence, financing, appraisal, and home sale contingencies.
- Contingencies have strict deadlines that must be followed
Common Types of Contingencies
Due Diligence
Sometimes referred to as an Inspection Contingency, the Due Diligence period is arguably the most important. Due diligence is an agreed-upon period of time between an accepted offer and the buyer agreeing to proceed toward closing. With a Due Diligence contingency, a buyer can inspect the property, renegotiate price and terms, or walk away from the sale completely for any reason during the due diligence period.
Some market conditions allow for longer due diligence periods to be negotiated, while other markets have buyers waiving their rights to due diligence. It’s best to work with an agent who is a Strategic Guide, not just an average agent, to know how to negotiate due diligence effectively.
Finance Contingency
A Finance Contingency gives the buyer a way out of the contract if they don’t get approved for the method of financing included in the offer. Finance is a common type of contingency as most buyers need to get a loan fully approved before proceeding to closing. Buyers should get pre-approved for a mortgage to give the seller confidence in accepting their offer, and in some cases, reduce the need for a finance contingency.
Appraisal Contingency
An Appraisal Contingency makes the contract contingent upon the home appraising at or above the sales price. Lenders require a home appraisal when doing a mortgage to ensure the property is worth the mortgage risks. If the house doesn’t appraise for the full value of the asking price, the buyer has some choices in how to move forward. If the buyer has the money and still wants to buy the home at the list price, the buyer can pay the difference between the contract price and the appraised value as additional money due at closing, and continue to move forward with closing. A buyer can also ask the seller to renegotiate the price to match the appraised value, or they can negotiate to meet in the middle with both sides giving a little. The seller may or may not be willing to negotiate, so with an appraisal contingency, the buyer can cancel penalty-free and get their earnest money back.
Home Sale Contingency
A Home Sale Contingency is often used when the buyer needs to sell their current home before they can afford to buy the next home. These contingencies may include a kick-out clause that allows the seller to pursue other offers and move forward with the second buyer, essentially kicking the first buyer out of the contract if the first buyer doesn’t remove the home sale contingency within 24-72 hours. In a buyer’s market, home sale contingencies add confidence for a smooth transition, but in a seller’s market, it could place buyers at a major disadvantage.
Navigate Contingencies With a Strategic Guide
Contingencies can be excellent tools to help buyers (and sometimes sellers), but it’s essential to be strategic about which ones work best to help find your path forward. Reach out today to start a conversation with a strategic guide. We’ll learn what matters most to you and craft a custom plan to help you achieve your goals and maximize results.
