Talking Contingencies
Understanding contingencies is key to a successful offer in the Bay Area. Here's why.
Contingencies are an important component of an offer for both buyers and sellers. One way to think of the concept of contingencies is like “get out of jail free cards” for the you, the buyer, because of the protection they offer during a transaction.
Including contingencies in your offer means a way for you to back out of the contract under specific circumstances, while retaining the ability to get your 3 percent Earnest Money Deposit (EMD) back.
The strategic decision to waive or include contingencies in your offer should approached very thoughtfully. While buyers love the protection that contingencies can offer, sellers look at contingencies differently. From a sellers prospective, contractual contingencies act as ways for a buyers to back out of a contract.
It's important to note that including contingencies of any sort in an offer does make the offer appear weaker in the eyes of the seller.
While an offer that includes contingencies feels like less of a sure of bet to a seller, as long as your Realtor is strategic, a buyers can still have a successful offer that includes contingencies.
Inspection Contingency
A home inspection contingency could well be the most important one for home buyers. This contingency gives buyers the right to have their new home professionally inspected after putting down earnest money. And finalizing the real estate transaction usually hinges on this contingency. If something is wrong, a contingent offer allows the buyer to request that it be fixed and to renegotiate the price—or back out of the sale.
It’s not always advisable to waive an inspection contingency, and home buyers should generally consider this a must-have clause in a sales contract. Once you know the problems, you can talk with the sellers about what they need to fix before you buy the home.
Appraisal Contingency
With this real estate contingency, a third party hired by the mortgage lender evaluates the fair-market value of the current home for sale. In the event that the appraised value proves to be less than the sale price, the appraisal contingency lets you back out of the deal.u can be flexible on the possession date, the seller will be more apt to choose your offer over others.
In hot markets, eager buyers might feel pressured to waive a contingency, but they could end up paying more. However, the lender will only put up a certain amount of money for the appraised cost—which may not be the asking price—and the buyer will have to cover the rest.
For example, let’s say you have a fixed-rate loan that covers 90% and youneed to put 10% down for a home selling for $500,000. If the property is appraised at $475,000, the lender is only going to cover 90% of that appraised value, or $427,500. In this case, instead of a $50,000 downpayment, you would be expected to put down $72,500 to cover the difference. Waiving this contingency in the purchase contract can be a gamble.
Loan Contingencies
You don’t want to sign a property sale without having the money to back it up. A mortgage contingency is a contingency that protects the buyer and seller from getting into a real estate sale without a proper loan. Under this contingency, the buyer has a specified period of time to obtain a loan that will cover the mortgage after the offer is accepted. If the buyer can’t get a lender to commit to a loan, the buyer has the right to walk away from the sale with the down payment.
Like an appraisal contingency, eager buyers and sellers in hot real estate markets might want to waive this contingency for the current home for sale, especially if cash is on the table. But waiving this contingency means that if your mortgage lender delays or denies your loan after a seller accepts your offer, you can lose the deposit during escrow, so it’s a risky venture.