What contingencies should I put in my offer?

What is a contingency?

A home contract contingency is a condition that must be met before the house can actually sell. Contingencies allow the buyer to make an offer on a home but allow themselves a way out of the contract if certain conditions are not met. Without contingencies, many offers wouldn’t be placed because the buyers couldn’t be sure they were protected against things that could make buying a home a bad deal.
Essentially, a contingency allows a buyer to continue investigating and getting their ducks in a row before the purchase of the home goes to closing.

How do contingencies work?

When you make an offer on a home, you will have a written contract. In that contract, you can write certain requirements that must be met before closing the deal.
The time between getting a contract and closing is often called escrow. During escrow, both the buyer and seller will be working to resolve all the contingencies in the contract. This might mean scheduling an inspection or securing loan funds. Whatever the contingency, it is during this period that it must be resolved or the closing will not take place unless you renegotiate the contract.

What are typical contingencies found in a home purchase contract?

There are many standard contingencies in a home purchase contract. In fact, some are so standard that a real estate agent’s contract has them listed and all you have to do is check the box for the ones you wish to include. Here are a few that are standard.

1. 1. Inspection: This contingency states that the home will be inspected by a certified home inspector within a given period of time. The buyer must be satisfied with the results. If they aren’t, the contingency will state what needs to be done to keep the contract in place. Although you can choose to take a home “as-is”, this is one contingency that you really should include on all contracts.
   2. Financing: This contingency states that the sale depends upon the buyer being able to get a loan for the house. The buyer can even specify what type of loan they expect so that they aren’t forced to take a high-interest loan or adjustable-rate mortgage if that isn’t what they had anticipated. Typically, this contingency also states the period of time in which this must be accomplished.
   3. Appraisal: This contingency states that if the appraisal on the house doesn’t come back at the purchase price or higher, then the contract is void. You can also establish that if the appraisal isn’t high enough that the Seller will be willing to drop the price. This is often part of the financial contingency since loan officers will not loan money on a home that has been appraised for lower than the loan amount.
   4. Insurance: This contingency states that the buyer is able to get homeowners insurance on the home. Some homes simply can’t be insured because they are in a floodplain or earthquake zone or have had mold issues in the past. If this happens, the contract will be voided.
   5. Title: This contingency states that the seller is truly the owner of the property. Typically, the owner believes everything is fine, but things such as divorce, contested wills, or liens can call into question the ownership. A title company can do a title search to determine the true owner of a home. If there is a title issue, the contract can be terminated.

Additional Contingencies to Consider

Beyond the typical contingencies, others may also be added to the home-buying contract. The most common additional contingency is for selling a current property. In this case, the buyer stipulates that they will purchase a home only if they are able to sell their own home in a specified period of time.
Other additional contingencies include:

1. 1. • Seller’s ability to find and purchase another home
      • Termite letter stating there is no termite damage to the home
      • Lead paint test stating there is no lead paint on the premises
      • Radon testing stating there is no radon present
      • Mold inspection stating there is no mold present
      • Private well inspection stating that the water in the well is suitable for drinking
      • HOA rules stating that you must approve of the HOA rules

Are contingencies a good idea?

Now that you understand what contingencies are and which ones are common, the question becomes whether adding them to your contract is a good idea or not.
In most cases, having a few contingencies makes sense. In particular, adding the inspection and financing contingencies allows you to look into the home you are buying and make sure you can get adequate financing for the deal.
However, the more contingencies you require, the less likely the seller is to take the offer. You have to remember that the seller is trying to sell his home quickly and easily. Lots of contingencies can cost him valuable time, especially if you end up backing out of the deal several weeks into the escrow period.
Therefore, use contingencies wisely. Be sure to protect yourself, but don’t add more than necessary.
Also, realize that contingencies are a good way to negotiate. If you want certain repairs made due to an inspection and the seller doesn’t want to make them, you might be able to negotiate a lower price on the house. Sometimes, then, a contingency doesn’t mean that you have to back out of the deal, but instead may use it as a way to renegotiate a better deal for yourself.