Common Contingencies For Home Buyers To Consider

You finally receive an offer from a buyer to purchase your home. All those weeks of staging, scrubbing windows and polishing kitchen countertops have paid off. But there’s one possible hitch: The buyers are including a home sale contingency clause with their offer.

A contingency clause is an addition to a purchase contract stating that a specific event must happen before a real estate transaction can close. If this event doesn’t happen, the buyers can walk away from the sale, usually without losing what’s known as earnest money, or dollars they deposit in an escrow account to show they’re serious about buying your home.

A contingency clause for buyers can pose real risks for sellers. You’ll have to determine if the offer is attractive enough to take on this risk, all the while wondering if accepting this offer will scare away bids from other possible buyers. You’ll also have to include language so that you’re protected in case you want to back out of the sale.

Since contingencies are important for both the buyer and seller, we’ll help you understand what they are and how to include one in a purchase contract.

What Is A Contingency In Real Estate?

A contingency is a condition in a real estate contract that must be met before a home sale can be finalized. If one or more conditions listed in the purchase agreement aren’t met, the buyer has the right to back out of the contract without losing any earnest money. In other words, the money a buyer puts in deposit in an escrow account to show they’re serious about buying your home will be returned.

Most contingencies are routine and rarely derail a sale, but there may be ones that can delay or even prevent the closing process.

Contingencies can be created for almost any concerns or needs, though the consequences are generally the same. If the contingency clause isn’t met, the purchase becomes null and void. Or, if either the buyer or seller backs out and the contract is still in effect, the one backing is considered to have breached their contract. Legally, the other party can enforce the consequences outlined, whether it’s someone suing for losses, or some other type of financial penalty.

Depending on the needs of the buyer or seller, contingencies can also be written to include the timeframe when conditions need to be met. For example, the seller can stipulate that the buyer needs to complete the home inspection within 15 days of signing the purchase contract. Or, the buyer has 30 days to secure a mortgage in order to close on the home.

Whatever the contingency, it needs to be clearly written and outlined in the contract so that all parties understand exactly what their responsibilities are.

Common Types Of Buyer Contingencies

Though not exhaustive, the following are the most common types of contingencies

Appraisal Contingency

This type of contingency allows the buyer to cancel a sale without penalty if the result of the home doesn’t appraise for a high enough value, or meet a certain amount. This helps the buyer ensure they meet their lender requirements, which typically states that buyers aren't allowed to borrow more than the property is worth.

Inspection Contingency

The most common contingency is the home inspection contingency. This condition on an offer states the home sale will only be finalized if the property passes a professional home inspection.

In other words, buyers can walk away from a home sale if the home inspection turns up serious problems. Since the definition of "serious problem" can result in a debate, it can be important to define what that is.

Financing Contingency

Sometimes referred to as a mortgage contingency, a financing contingency states that a sale will go through only if the buyers are able to secure financing from a mortgage lender. That’s because many buyers can’t afford a home without a mortgage.  

Home Sale Contingency

The home sale contingency can allow time for buyers to sell their home before the home purchase is finalized. If the buyer’s current home doesn’t sell, they can back out of the deal.  The buyer can then get back their earnest money.

Since this type of contingency mostly benefits the buyers, sellers may be very hesitant to agree to it. This is especially true if it’s a seller’s market and there are multiple offers coming in. A home sale contingency may be accepted if the real estate market where you are is slow, and the house has been listed on the market for an extended period of time.

Homeowners Insurance Contingency

A homeowners insurance contingency as a condition stating that the buyer must obtain homeowners insurance before closing, or before the sale is finalized. If not, then the purchase contract is considered null and void. Typically it’s either the seller or mortgage lender that requests this type of contingency.

Benefits Of Including Buyer Contingencies

• Some benefits of including buyer contingencies:
• Allows the buyer to back out of the sale if it poses too much risk
• Provides more time to ensure the buyer is making the right decision
• Ensures you’re able to afford to buy the home (if you include the financing contingency)
• Protects you against agreeing to a purchase price higher than what is appraised

Risks Of Including Buyer Contingencies

While buyer contingencies can protect you, there are some risks involved. Some of these include:

• Can make a buyer’s offer less competitive compared to offers with no contingencies
• Can make for a lengthier selling process, especially if there are extensions for contingencies
• Can lose your earnest money deposit if conditions aren’t met
• Can be stressful for both parties when negotiating the purchase contract

When Should You Make A Contingent Real Estate Offer?

Like mentioned above, there are several standard contingencies typically added to a purchase offer. Of course, you can waive all or some of them depending on your circumstances.

The type of contingencies you want to add will depend on how you want to protect yourself as a buyer. For example, if you’re a first-time home buyer and want to make sure the home you buy doesn’t have serious flaws, you’ll want to include a home inspection contingency. That way, if there are serious issues, you can negotiate with the seller for them to make repairs or back out of the contract and get your earnest money back.

Or, it could be that you want to be able to sell your house before closing on your new one. In this case, it may make sense to stipulate a home sale contingency when making an offer.

Keep in mind that some contingencies are more readily accepted by sellers than others. It may be a good idea to consult your real estate agent for advice on how to proceed when you want to put an offer on a house.

When Should Buyers Waive Contingencies?

Though risky, there are some situations when it may make sense to waive a contingency, especially if it’ll help you appear more attractive to sellers.

Situations can include the following:

• If you’re in a bidding war: If you really want the home and there are multiple offers, not having any contingencies can help your offer stand out.
• Buying a new construction home: In most cases, you don’t need to worry about the home having flaws. Most builders will also have warranties with their new constructions as well.
• You trust the seller: If you were to purchase a home from a family member for instance, it may make sense to waive the contingencies to make the closing process faster.

The Bottom Line

Buying a home can come with a lot of risk, so it’s important to weigh the pros and cons as to whether you want to include any contingencies as a home buyer. Whatever you choose, make sure you work closely with your real estate professional so you understand what you need to move through the closing process successfully.

Before buying a home, it’s a good idea to get as financially healthy as possible. To help you prepare, sign up with Rocket Money^SM for free to help you track and manage your finances.