Real Estate Agent and Trainer, Robert Rico, explains the different types of contingencies in real estate transactions. Do you want to see more video blogs? Subscribe here!
Welcome back to the CA Realty Training Blog! This week, we are covering some real estate terminology that comes up in almost every home sale, so it’s definitely important to know.
We are talking about contingencies this week. What’s a contingency? In the formal definition, a contingency is “a provision for an unforeseen event or circumstance.” In real estate, this means that the offer is contingent on a certain matter happening — it will happen only if requirements are met.
For example, let’s say we have a house listed at $1,000,000 and we have an interested buyer. The market is hot right now, so they offer the full list price of $1,000,000. Great! However, there are a few contingencies attached to the offer — basically saying “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 main ones — appraisal, inspection, and loan. Let’s dive into each one individually below!
- Appraisal Contingency
- Inspection Contingency
- Loan Contingency
An appraisal contingency is very reasonable, and protects the buyer (as do all contingencies) in the case that the house actually appraises at the correct value. The buyer, through the loan company’s closing costs, must pay for an appraiser to inspect and write a report on the home’s value. 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 contingency check-box is checked. At this point, the buyer signs a form to remove that contingency from the offer.
Though the appraiser does go to the house, they are not a home inspector, so they aren’t the ones that are putting together an inspection report. This is what the buyer would need to lift the inspection contingency. As we have covered in our blog about it, an inspector goes in the attic, crawls under the house, checks for termites, looks at any defects or deferred maintenance, and puts everything that he finds into a report. As a general rule of thumb, the bigger the report, the worse condition the house is in. If everything goes well for our example, the inspection report comes back “clean,” and the buyers feel comfortable signing the removal form.
This contingency is exactly what it sounds like — a contingency for the buyers getting loan approval from their bank or mortgage broker. This one is absolutely crucial for the deal going through. Though the contingencies all are equal on the contract, people are more likely to waive the appraisal contingency than they are to come up with $1,000,000 cash. Most people don’t have that in their savings account! If, for some reason, the lender will not approve the loan, the deal is often dead in the water — the sellers will have to select a different offer, with more stable financing. This is why cash offers are so highly prized: because the seller knows that there will be no issue with financing/loans.
Each contingency also has a time frame attached to it. For example, all of them used to be 17 days, and on the 17th day, the buyers had to sign a form removing all contingencies. Now, appraisal and inspections are still at 17 days, but the financing (loan contingency) is now at 21 days. This gives the buyer a few extra days for the lender to review the appraisal/inspection before they give final approval on the loan.
After all these contingencies have been met, the buyers’ protection has expired and they are proceeding with their purchase. It’s a nerve-wrecking time for the buyer (especially a first time homeowner!) but is an exciting moment for you as an agent — this means the deal is proceeding forward and you’re on your way to getting paid!
We hope we did a good job covering contingencies for you this week, as well as explaining the more common ones and their timeframes. As always, we are working hard to provide you the best jumping off point for your real estate career — be sure to utilize all the resources we have created. If you have any questions or comments, leave them below, and don’t forget to subscribe! See you next week! 🙂