A contingency is a clause inserted into an offer to purchase contract stating that you will purchase the home contingent, or conditional, upon a particular issue or factors. Contingencies protect you, the buyer, by offering you a lawful “out” with all your deposit money returned. The two most common contingencies we use are the inspection and mortgage contingencies. Remember the more contingencies you have in the offer to purchase, the less appealing the offer can become to the seller. You want to protect yourself without going overboard and therefore losing the chance to purchase the home you want. Below we will go over some of the contingencies we use and explain them to you.

Inspection Contingency

An inspection contingency gives the buyer the right to have the home inspected within a specified time period, most often 5-10 days. It protects the buyer, who can cancel the contract or negotiate repairs based on the findings of a professional home inspector. An inspector examines the property’s interior and exterior, including the condition of electrical, plumbing, structural, pest, and heating elements. The inspector provides a report to the buyer detailing any issues discovered during the inspection. Depending on the exact terms of the inspection contingency, the buyer can:

  1. Have no issues with the inspection report and the deal moves forward. Almost every inspection finds things that are not perfect with a home, and it comes down to how much you want the home.
  2. The home has too many issues to deal with or some big issue that you would rather not deal with. Even if you don’t feel right about the home after the inspection now is the time to get out. In these cases you can back out of the deal and have your deposit (earnest money) returned to you.
  3. Request time for further inspections if something needs a second look. We can always ask for a time extension to get this done if we are close to the deadline. I find that it is always best to try and get your inspection done early in the stated time period just in case you want to bring in an expert to check out something the inspector was not sure about.  This way we are not dependent on the seller’s agreeing to the time extension.
  4. After the inspection we can request repairs to be done or ask for a reduction in the purchase price. If the seller agrees, the deal moves forward to the Purchase & Sale contract (P&S). If the seller refuses, the buyer can back out of the deal and have his or her deposit money returned. Or you can still move forward at the current price.

Financing Contingency

A financing contingency (also called a “mortgage contingency”) gives the buyer time to apply for and obtain financing for the purchase of the property. This provides important protection for the buyer, who can back out of the contract and reclaim his or her earnest money in the event he or she is unable to secure financing from a bank, mortgage broker, or other type of private lending. A financial contingency will state a specified number of days that the buyer has to obtain financing. The buyer has until this date to terminate the contract (or request an extension that must be agreed to in writing by the seller) otherwise the buyer automatically waives the contingency and becomes obligated to purchase the property — even if a loan is not secured.  You can lose your deposit money here so this step is very important.  Bird Dog Real Estate will be in contact with you about this date until your lender gives you a cleared to close letter. Once you have the cleared to close letter we can start getting ready for the closing.

House Sale Contingency

Although in most cases it is easier to sell before buying another property, the timing and financing don’t always work out that way. A house sale contingency gives buyers a specified amount of time to sell and settle their existing homes in order to finance the new one. This type of contingency protects buyers because, if an existing home doesn’t sell for at least the asking price, the buyer can back out of the contract without legal consequences. House sale contingencies can be difficult on the seller, who may be forced to pass up another offer while waiting for the outcome of the contingency. The seller retains the right to cancel the contract if the buyer’s home is not sold within the specified number of days.  Sellers should add a kick-out clause or right to first refusal if they are going to let buyers place this in the offer to purchase.

Kick-Out Clause

The kick-out clause is a contingency added by sellers to provide a measure of protection against a house sale contingency. While the seller agrees to a house sale contingency, he or she can add a kick-out clause stating that the seller can continue to market the property. If another qualified buyer steps up, the seller gives the current buyer a specified amount of time (such as 72 hours) to remove the house sale contingency and keep the contract alive otherwise, the seller can back out of the contract and sell to the new buyer.

Other Contingencies

Those are the big ones, but here are some other contingencies you may want to build into your offer and/or Purchase & Sale (P&S):

  1. To have the seller pay some of your closing costs. For example, “seller to pay $5,000 of buyer’s closing costs.” This helps to keep more money in your pocket after closing.  Some sellers do not like to do this and/or do not understand it. I have seen it ruin deals because of those reasons, so use it if you need to but know the risks associated with it.
  2. Review of condo documents and budget to buyer satisfaction. This one is a must add for all condo purchases.
  3. “Seller to include washer, dryer, refrigerator and/or etc.” in the deal. You can ask for anything in the offer and the seller can exclude anything they want to (sellers should tell listing agent what they want excluded before the listing hits the market).  If it is built into the home, it should go with the home but if you have any doubt on it please place it into the offer to keep surprises away later on. A lot of these issues can be negotiated throughout the offer process but make sure whatever is agreed to in the offer process flows over and is placed in the P&S.  It will save a lot of stress and aggravation later on.
  4. “To have the home be professionally cleaned before closing.” We do not use this one that often, but it is there if you want to put it into the offer. Most times we place in the offer that the home will be delivered in a “broom swept condition” which means the home should be cleared on any unwanted items and debris. If something is at the home that you want gone before closing, make sure you let your broker/agent know.
  5. “To have a final walk through on closing day or some time period before closing.” This is to make sure there are no surprises and the home still looks the same way when you saw it. Normal wear and tear is to be expected — you are looking for items that were hidden or not taken care of as stated in the P&S. What can we do if we find something not done or that we did not know about? We can ask for a “Hold Out,” where a portion of funds is withheld from the seller until these items are taken care of. We need the seller to agree to this, and that does not always happen. This is when it is nice to have attorney as part of your real estate team. These issues are better dealt with by attorneys who know the laws and know how to go about getting these issues resolved.

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