What You Need to Know About Real Estate Contingencies

real estate contingencies

Contingencies—provisions for unexpected events or circumstances related to the purchase of a home—are an important part of a real estate contract. Contingencies can help protect you, the buyer, if a problem arises after you’ve put money into escrow. Here’s what you need to know about real estate contingencies.

Hard and soft contingencies

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

The inspections contingency

Inspection is the biggest and best contingency, a potential “get out of jail free card” for buyers. It allows you to walk away without losing money if an inspection has uncovered issues with the home. For example, it’s common for buyers to uncover broken or defective items, older systems or health and safety issues.

You might assume it would be difficult to exit a contract from a brand new and flawless home. But the inspection contingency language in most contracts provides for an easy out.

If you find something unexpected, you don’t necessarily have to abandon the contract, of course. Go back to the seller and see what they will fix.

Home appraisal and loan approval contingencies

Getting pre-approved for a loan before making an offer is only part of the lending process. Before the lending institution wires the funds for your mortgage, it wants to be sure the property is worth what you offered the seller. This is why an appraisal is needed and is sometimes a standalone contingency.

The appraiser is an independent third party who walks through the home, takes pictures and measurements, and comments on its condition in a written report.

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

The loan approval, which can take up to 60 days, is the longest contingency. In competitive markets, it can be done in under two weeks. Be in touch with your lender before you make an offer, and strategize on timeframes.

Disclosures

Sellers in most markets must disclose, via boilerplate local or state forms, their knowledge of the property and 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, the seller must disclose it.

Typically, sellers deliver the disclosures to buyers after their offer is accepted. Additionally, buyers will review local building department documents alongside local, state or federal disclosures regarding anything from earthquake hazard zones to flood zones to disclosures about proximity to airports.

Don’t sign a contract without reviewing your contingency options with your agent. Keep in mind that contingencies are terms that can sometimes be used for negotiation. If you can’t offer the highest price, the seller may appreciate moving fast once you sign a contract.

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