By Karen D. Friedman
What’s a contingency?
According to Oxford Languages, a contingency is “a provision for an unforeseen event or circumstance.” To a real estate agent, this means that an offer happens only if certain requirements are met.
All contingencies are designed to protect the buyer in the event that their conditions are not met.
Let’s say you have a house listed at $1,000,000 and you have an interested buyer. So, the buyer offers the full list price of $1,000,000 – great! But, there are a few contingencies with to the offer. This means “we will give you $1,000,000 for this house, but ONLY IF certain conditions are met.”
Now, what are the conditions that often accompany an offer?
We will discuss the three contingencies that you’ll see, which are appraisal, inspection, and loan. So, let’s first start at appraisal.
What is an Appraisal Contingency?
If the offer has an appraisal contingency, the buyer will purchase the house ONLY IF the house appraises at the offer price. So, the buyer will pay for an appraiser to inspect and write a report on the home’s value.
An appraisal contingency is reasonable because it protects the buyer if the house does not appraise at the offer price.
In our example, we have a list price of $1,000,000. So, the seller hopes that the appraised value is $1,000,000 or higher. Let’s say it appraises right at $1,000,000. The seller is happy, the buyer is happy, and the appraisal contingency can now be removed.
At this point, the buyer signs a form to remove that contingency from the offer and proceed with the sale.
But, wait! What happens if the listing does NOT appraise at the offered price? The contingency is the safety net. In this case, the buyer can cancel the deal and get their deposit back.
What is an Inspection Contingency?
A general inspection contingency is to understand the home’s structural integrity. In other words, it determines if the home has good bones.
An inspection contingency lets the buyer purchase ONLY IF the home passes inspection. In this instance, a buyer hires an inspector to conduct a home inspection.
An inspector will go into the attic, inspect under the house, will check for termites, look for any defects or deferred maintenance, and will put everything that they find into a report. Typically, a big report means big issues with the home.
If the house passes inspection, the inspection report comes back “clean.” This is what the buyer would need to lift the inspection contingency and feel comfortable signing the removal form.
Just like the appraisal, in the event that the home does not pass inspection, buyers can cancel the deal.
What is a Loan Contingency?
A loan contingency permits a property purchase ONLY IF the buyers can get loan approval from their bank or mortgage broker. This one is crucial for the deal to close.
This contingency gives buyers the time to secure financing. Most people don’t have the full purchase amount available, which makes them rely on a lender’s approval.
If the lender does not approve the loan, the deal gets canceled. The sellers will have to find an offer from another buyer who has financing. This is why cash offers are so valuable. Cash buyers mean there is no need for loan contingencies.
Most buyers get pre-approved before they start looking at homes. This ensures they only make offers on the properties within their price range and it eliminates the need for a loan contingency. This also makes their offer more attractive to sellers.
What are the Timeframes of Contingencies?
Contingencies have a timeframe when they are added to an offer. They’re not open-ended. Here are the timeframes associated with each contingency:
- Appraisal Contingency: 17 Days
- Inspection Contingency: 17 Days
- Loan Contingency: 21 Days
Although these are the default time frames on the contract, they’re also negotiable.
Again, the contingencies act as a safeguard for the buyer. But, they end at a specific time so the seller can entertain other offers. For example, if the buyer can’t get a loan, the seller can move on to the next offer.
After all, if the contingencies are met at the end of the 17- or 21-day deadline, the buyer will sign a form removing all contingencies. The buyer’s protection is now removed in terms of backing out of the deal and getting their deposit back.
Final Thoughts on Contingencies in a Real Estate Transaction
Having contingencies will protect the buyer. But, offers with few to no contingencies are the most attractive to sellers. That’s because fewer contingencies mean fewer reasons the deal fails.
Also, the buyer can choose not to use contingencies. Especially if the listing is hot and there are multiple offers.
For example, if a buyer wants to buy a new construction, which has the same price as other houses in the area, the buyer can choose not to add an appraisal and inspection contingency. From the seller’s perspective, this will make the buyer’s offer worthwhile and stand out.
Each transaction is different. Always evaluate the market data and conditions before advising your client on how to write the offer and what contingencies to add.