Can Contingencies Help or Hurt Your Real Estate Deal?

Can Contingencies Help or Hurt Your Real Estate Deal?

Can Contingencies Help or Hurt Your Real Estate Deal?

Does anyone really understand what the word “Contingency” means? Webster’s Dictionary defines Contingencies as:

  1. The quality or state of being contingent
  2. A contingent event or condition: as,
    1. An event (as an emergency) that may but is not certain to occur (trying to provide for every contingency)
    2. Something liable to happen as an adjunct to or result of something else

Contingency in Real Estate Contracts

So in Real Estate what does “Contingency” mean? One important aspect of a real estate contract is contingencies. Contingencies can help protect buyers if a problem arises. 

Contingencies are always tied to a time-frame. If it’s a hard contingency, the buyer must sign off physically in writing. If it’s a soft contingency, it simply passes with time. Know the difference between the two, and mark your time-frames early.

The Three Big Contingencies to Know in Real Estate are:

  • Inspections
  • Loan Approval and Home Appraisal
  • Disclosures

Let’s look at each of these contingencies to better understand how they relate to your real estate deal.

Inspections

The biggest and best of the contingencies, the home inspection is the “get out of jail free card” for buyers. It allows you to walk away once you’ve had an inspection if you discover issues of health and safety with the home. For example, it is common for buyers to uncover broken or defective items, older systems or health and safety issues. The contingency wording in a contract, whether for an older home or even a new construction home, will help the buyer walk away from the deal if the items found in an inspection can’t or won’t be fixed by the seller. Once the inspection is finished, address the issues found with your REALTOR®. Be careful in how the addendum asking for items to repaired or replaced is worded. Everyone has a different perspective! Spell out exactly what needs to be fixed or replaced so there are no surprises down the road as the closing date nears. 

Real Estate Contingencies

Unexpected inspection issues often result in a second round of negotiations. If the items are big enough to kill the deal, the seller may agree to fix them or issue a credit at closing. In competitive markets, the seller may leave the defects for you to deal with as the new owner. In the foreclosure market, most of the REO Companies will not fix anything found wrong with the home. This gives new meaning to the phrase “Sold As Is, Where Is.”

Loan Approval and Home Appraisal

Getting pre-approved prior to making an offer is only part of the lending process. Before it wires the funds for your mortgage, the bank wants to be sure that the property is worth what you offered the seller, by way of an appraisal (sometimes called a standalone contingency).

Real Estate Appraisal Contingency

The appraiser is an independent third party who will walk through the home, take pictures and measurements, and comment on its condition, then follow up with a written report. 

Second, a title report will be issued so the lender can see if there are outstanding liens or clouds on title. For condominiums or planned unit developments, the bank wants to review the governing documents and financials to make sure all is in order. 

The loan approval, which can take up to 60 days, is the longest contingency. If you are paying cash, the deal can usually close in a couple of weeks. Be in touch with your lender before you make an offer, and strategize on time-frames. 

Disclosures

Disclosures are meant to provide the buyer with as much information as possible to make an informed decision, as well as protect their soon-to-be-interest. 

Sellers in most markets must disclose, via local state forms, their knowledge about the property and their experience living there. For example, if there was a leaky roof or if they know about a neighboring development that could affect the home’s value, they must disclose. 

Disclosure Contingency in Real Estate

If a seller has never lived in the home, typically the agent will recommend to the seller to write across the form the wording stating that he or she has never occupied the property. 

Typically, sellers deliver the disclosures to buyers after their offer is accepted. Additionally, buyers may review local building department documents alongside local, state or federal disclosures about anything from earthquake hazard zones to flood zones to disclosures about proximity to airports. There is also a Lead Based Paint Disclosure required to be signed by the seller is the house was built in 1978 or earlier. 

Before you sign a contract, review your contingency options with your REALTOR®. Know that contingencies are terms and can sometimes be used in negotiation. 

Here at The Cummings Company, our agents understand how to help the buyer and/or seller in negotiating contingencies. Every contract is different. Every home is different. Every transaction is different. Let us help you understand how the process works. Give us a call today at 251-602-1941 and let us put our experience to work for you.

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