Understanding Contingencies and Why They're Important

Sales Contingencies

Understanding Contingencies

As a seasoned real estate professional, it is my responsibility to safeguard my clients' best interests. Whether working with buyers or sellers, I guide them through the potential impacts' contingencies can have on their sales process. A significant aspect of my role involves minimizing risks and ensuring that my clients grasp the nuances of the offers they are evaluating. If you are looking to make an offer or you're simply here to learn about the most commonly used contingencies in real estate, you've come to the right place. If you have any questions, do not hesitate to reach out. My mobile is 646.586.3745 and my email is stephanie.betancourt@raveis.com

Appraisal Contingency:

An appraisal contingency gives the buyer the opportunity to legally pull out of the deal in the event the property doesn’t appraise at the agreed-upon sale price. Without an appraisal contingency, the buyer may still need to get the property appraised to use mortgage financing. If the house is appraised for less than the agreed-upon sale price, the buyer may not be able to get the financing he needs to purchase the property and can either pull out of the deal, try to renegotiate the price or the buyer will need to come up with the difference between the sales price and the appraised value. 

Finance or Mortgage Contingency: 

Most purchase contracts include a finance contingency, or mortgage contingency, that allows the buyer a certain period of time to arrange for financing. If the buyer cannot obtain the specified financing within a certain time frame, the buyer can be released from the agreement, the deposit is usually returned, and the property is placed back on the market. 

There are several variations of this contingency in use. In the most common type, the contingency states that the buyer has a certain number of days to secure a loan commitment letter. If that deadline passes, and the buyer doesn’t terminate the contract or request an extension (which the seller must grant in writing), then the buyer has committed to purchasing the home.

Without a finance contingency in place, a buyer who, for whatever reason, is unable to secure financing may lose her earnest money deposit.  

Home Inspection Contingency:

A home inspection contingency allows the buyer time to get a professional home inspection completed. In a very competitive market, homeowners only allow buyers to do this for informational purposes only. Home inspections check the overall structural condition of the property: everything from foundations and roofing to major systems like heating and air conditioning.

This contingency provides the buyer with options if the home inspection uncovers problems with the property. If the repairs are minor, the contingency gives the seller time to make the necessary repairs. If the repair requirements are major, the seller may has the option of reducing the selling price, or the buyer can have the option of being released from the purchase agreement.

Sale of Existing Home Contingency aka Hubbard Clause:

If a buyer wants to purchase a home but needs to sell his current home to come up with the needed funds, you can insert a sale of existing home contingency into the offer that makes the entire transaction dependent on a successful sale of the home the buyer currently owns. It’s important to keep in mind, though, that sellers and their agents frequently balk at this, because it could delay the purchase for months. If your clients are competing against other offers, this type of clause may be enough to knock them out of serious consideration.

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