WHAT ARE CONTINGENCIES AND WHY DO THEY MATTER?
Buying your dream home is one of the most rewarding things you can do, but it can also be extremely stressful. As a buyer, it’s important to understand your rights, especially since you’re signing a contract with a lot of confusing legalize! Here’s what you need to know.
What is a Contingency?
Contingent literally means, “intended for use in circumstances not completely foreseen”.
Contingencies are buyer protections. If you as a buyer cancel your contract without protected legal justification after making an offer on a property, you risk losing your 3% earnest money deposit (hereinafter “EMD”). Contingencies are the various legal bases for cancellation of the contract without losing your EMD – and in the East Bay, your EMD is often tens of thousands of dollars!
Do all contracts have the same contingencies?
No. Different contracts may have all, none, or any combination of contingencies depending upon the negotiated terms.
Be mindful that the goal of a seller is different than that of the buyer. Whereas a seller prefers to have as few or no contingencies in the contract, a buyer hopes to make an offer with as many contingencies as possible.
What are contingency periods?
A contingency period is the time you have, when in contract, to execute a contingency to either renegotiate or get out of the contract. It is also very important to understand that different contingencies can– and often do– have different periods in which they can be utilized, so it's vital to know when each individual contingency expires within the contract period.
Now, let's look at the various specific contingencies you may have on your contract.
Appraisal contingency
When in contract, your lender will send out an appraiser to make sure the property is worth what you're paying for it. If the appraiser determines the property is worth less than the purchase price, they will only loan you the amount at which the home value is appraised. However, you're still in contract for the same negotiated purchase price, and if you don't have the appraisal contingency, you'll either have to make up the difference between your loan amount and the purchase price with cash, or you'll have to reconfigure your loan– often with a higher interest rate and higher monthly mortgage. If you have an appraisal contingency, you can renegotiate the terms of the contract to more accurately reflect the appraised value of the property. If you can’t come to an agreement on the price, you can cancel the contract and retain your EMD.
Loan contingency
If, for whatever reason, you don't get the loan you're promised from your lender, you risk losing your EMD unless you have a loan contingency. If you have the loan contingency, you're able to walk away from the contract and keep your EMD.
Inspection contingency
Once in contract on a new home, an inspection contingency allows you to do whatever inspections you want at your own cost. If anything comes up from those inspections that gives you pause, you can then cancel or renegotiate the terms of the contract without risking your EMD. If you don't have the inspection contingency, you must verify that you understand whatever inspections have been performed on the property and that you're aware of any known issues with the property prior to making your offer. Without an inspection contingency, you're essentially at the mercy of inspections the seller had performed prior to you making the offer. If, later on, you then have second thoughts about anything revealed in the initial inspections, or if you (or an expert) find something concerning after you submit the offer that results in pulling out of the contract, you risk losing your EMD.
Is it ever a good idea to waive contingencies?
I never advise anyone to do anything they’re uncomfortable doing, but the reality is that the East Bay market is very competitive. When you’re competing against 10 offers that waive all contingencies, it often means that waiving your contingencies is the only way to be on an equal playing field. *
Most importantly, make sure you’re working with a seasoned Realtor who can help you make informed decisions.
*This blog simply provides information and is not advising you of what contingencies you should or should not include in your offer.
Discuss your options with your Realtor and/or attorney.
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