It should come as no surprise that many home buyers want to protect themselves from suboptimal homes or harmful unforeseen circumstances. In real estate, the backup plans used to anticipate and protect against such problems are known as a “contingency,” and allow a buyer to back out of a contract if a specific situation occurs.
In other words, a contingency allows a buyer to cancel a contract without penalty.
A home buyer can have numerous contingencies that help safeguard them from numerous situations. However, some contingencies are more common than others. Three common contingencies are:
- Financial Contingency
- Inspection Contingency
- Appraisal Contingency
Financial Contingencies
As the name suggests, a financial contingency deals with a home buyer’s funding. For example, a financial contingency allows a buyer to cancel a contract if they cannot find a lender to approve a mortgage.
Home buyers should note that normally, this type of contingency requires a buyer to be specific about the type of mortgage and to seek mortgage approval within a fixed amount of time, usually 45 to 60 days.
Inspection Contingencies
Inspection contingencies help protect a buyer from purchasing a home with serious flaws—such as cracks in the foundation–that would impact its price.
A typical home inspection, which is conducted by a licensed professional, might include an examination of utilities and the roof, among others. In addition, some real estate professionals suggest a buyer have the entire piece of property inspected, including the lot.
Home buyers should also consider separate contingencies for:
- Radon
- Asbestos
- Lead
- Toxic Substances
- Mold
- Water
- Pests (Mice, bugs, etc.)
Appraisal Contingency
When a buyer obtains a loan for a home, the lender requires an appraisal. This is to insure the purchase price is reasonable and accurate. At times homes receive low appraisals, meaning a home is worth less than the agreed-upon purchase price. Having this contingency allows home buyers to avoid making poor financial decisions.
Other Contingencies
In addition to these common contingencies, there are many others that can make their way into contracts. If you are a home buyer, make sure to discuss the types and number of contingencies to include in your contract.
Other contingencies include:
- Sale of Your Prior Residence: This contingency hinges on a buyer’s ability to sell his or her current house. It keeps a buyer from being saddled with two properties.
- Approval by a Condo or Co-op Board: This allows a buyer to negate a deal if he or she isn’t accepted into a condo co-op association.
- Deed Contingency: A deed contingency insures a home‘s title is free of liens (legal claim to a property) and that the seller has the ability to sell the property. Some real estate professionals suggest a deed contingency to avoid scams in which a person renting a home claims to hold the valid title and is legally allowed to sell the property.
- Private Well Inspection Contingency: If a home is not connected to a municipal water system, it is important to learn whether the well water meets health standards.
- Home Owner Association Documents Contingency: Because the rules governing the residences of a homeowner’s association can affect a person’s use of his or her property, this contingency gives a home buyer an opportunity to review the HOA’s rules and fees.
- “Like It” Contingency: In some cases, a buyer might make an offer prior to seeing a home. In this circumstance, home buyers can include a contingency that they must tour and “like” the house prior to continuing.
- Insurance Contingency: Some potential home buyers seek this contingency to make sure they can insure their property. This is common in areas with environmental liabilities such as hurricanes, tornadoes, or earthquakes.
