If you’re like many people buying or selling a home in Sierra Vista, you need to know a little bit of basic real estate lingo. One of the terms you may hear from time to time is contingency. But what is a contingency, and what does it matter to your transaction? This guide explains.
Contingencies in Real Estate: What They Are, When to Waive and More
Contingencies are conditions that you or the other party in your transaction must meet before the deal can go through. If the party who is supposed to meet a condition doesn’t do so, the other party has the option to back out of the contract and typically gets their earnest money deposit back. (If you back out of a deal without a contingency protecting you, the seller usually gets to keep your earnest money deposit.)
With that said, there are several types of contingencies. Sometimes, people decide to waive them in order to make transactions go more smoothly. This guide covers:
- Types of contingencies
- When and why you may want to waive contingencies
- The risks you face if you waive contingencies
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Types of Contingencies in Real Estate
The most common contingencies involve things like:
- Home inspections
- Home appraisal
- Financing
Home Inspection Contingency
The home inspection contingency is probably the most common type of contingency. This contingency gives a buyer the right to have the home inspected within a specified time frame, which typically ranges between a week to 10 days after the buyer and seller signed the agreement.
The home inspection usually covers the home’s structure, roof, plumbing, HVAC and more. If the inspector uncovers major issues with these or any other major components of the home, the prospective buyer may have the right to terminate the deal.
The buyer may also choose to use the inspection report as a negotiation tool. For example, if a home needs a major repair (or even a minor one), the buyer may ask the seller to lower the sales price, make the repairs, or offer a credit so the buyer can pay for repairs after making the purchase.
Related: Sierra Vista demographics
Home Appraisal Contingency
A home appraisal is an effective valuation of a home. Only a certified appraiser may conduct an appraisal, which lenders require. Lenders require appraisals to ensure that they aren’t lending a person more money than is reasonable for the home’s purchase.
An appraisal contingency protects buyers by saying that the property must appraise at or above a specified price. Lenders typically only allow buyers to borrow the amount of money not the home appraises for. If the home appraises lower than the specified amount, the buyer can negotiate the price with the seller, try to find additional financing or spend money from their own pocket, or back out of the sale altogether. The appraisal contingency is often a powerful tool for buyers, especially in hot real estate markets where bidding wars may inflate home prices beyond their actual market value.
Related: Home inspections: The basics
Financing Contingency
Financing contingencies protect buyers by saying that the deal depends on the buyer’s ability to secure financing. The buyer typically has a set amount of time to obtain a loan to purchase the property. If the buyer is unable to do so, they can back out of the contract without being penalized. The terms of a financing contingency may vary.
When and Why You May Want to Waive Contingencies
Sometimes real estate agents encourage their buyers to waive certain contingencies. In very busy real estate markets, buyers sometimes wave contingencies to make their offers more appealing to sellers. If you, as a buyer, waive contingencies, you’re basically telling the seller that you’re confident in your ability to purchase the property and you’re willing to take on the potential risks associated with doing so.
The Risks You Face if You Waive Contingencies
Although waiving contingencies can make your offer more attractive to sellers, it does come with certain risks. For example, if you waive the inspection contingency and later discover that the home needs expensive repairs, you’ll be solely responsible for the cost. Likewise, if you waive the appraisal contingency and the home appraises for less than your offer, it’s up to you to make up the difference in cost. It’s very important that you understand these risks before you consider waiving contingencies just to make your offer more attractive to sellers. You should only make this decision with your real estate agent’s guidance.
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FAQ on Waiving Contingencies
Check out these commonly asked questions about waiving contingencies in real estate. If you don’t see the answer to your question here, give us a call. We’re here to provide you with the information you need.
Can a Seller Back Out if Contingencies Aren’t Met?
Sellers can absolutely back out of transactions if contingencies aren’t met. Contingencies are often designed to protect one or both parties in a real estate deal.
Can You Negotiate Contingencies?
You can negotiate contingencies just like you can negotiate almost any other aspect of a real estate transaction. It’s all part of the contract process.
What Happens if I Waive a Contingency?
When you waive A contingency, you’re essentially agreeing to accept the property without the conditions the contingency would normally require. Remember, you need to be cautious when you wave contingencies. Although it may make your offer more appealing to the seller, it generally increases your risk.
How Can You Back Out During an Inspection Contingency?
If the inspection reveals significant issues that you’re uncomfortable with, and if you can’t reach an agreement with the seller about repairs or a price reduction, you may back out of the sale without losing your earnest money deposit.
What Other Types of Contingencies Are Available?
Several types of contingencies are available when your real estate agent puts together your purchase contract. For example, your purchase of a new home may be contingent upon the sale of your old home; that means you must sell your old home before you are legally required to go through with the purchase of the new one. Or, your real estate agent may build a title contingency into your contract, saying that you’ll only purchase the property if the title is completely clear.
Related: The ultimate Sierra Vista house-hunting checklist
Are You Buying a Home in Sierra Vista or Cochise County?
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