Common Contingencies When Making A Home Offer

Now that you’re ready to make an offer on a house, maybe you’ve been asked if you’re planning on including a contingency. Or maybe you saw a listing that indicated that they will only accept offers without contingencies.

This makes you wonder: What are contingencies?

So I’m going to go over the common contingencies buyers put in their offers, what are the typical time frames, and when you should and shouldn’t use them.

Contingencies: What are they?

A contingency is a way for the buyer to protect themselves. This lets them get back the 3% down payment or earnest money deposit (EMD), in case something wrong happens. If ever the condition for that particular contingency isn’t met, then the buyer has the chance to back out of their offer.

Here are the common contingencies used in real estate:

Loan Contingency

Typically, when buyers buy a house, they don’t buy it outright. Most only have saved up enough to put in the 20% down payment plus closing costs. So they need a lender to step in to cover the rest of the purchase price.

Loan contingencies allow a buyer to back out of a purchase contract. This is helpful especially if the bank or lender didn’t approve their loan. There’s a 21-day time frame from when an offer is made to when an offer is approved.

So if a loan isn’t approved within those 21 days, the buyer can back out and get their EMD back.

Appraisal Contingency

During the loan application process, a lender would do an appraisal on the house the buyer wants to buy. If the home’s appraised value is lower than the purchase price, the lender might only lend an amount similar to the appraised value.

In this case, the buyer would have to make up for the difference between the appraised value and purchase price. Since most home buyers might not have that much money saved up to cover the difference, then an appraisal contingency would be a lifesaver.

This gives them 17 days from when they submit the offer to get an appraisal. If they find that the property is below the purchase price, then they have the option to not push through with buying the home.

Inspection Contingency

The third kind of contingency is called an inspection contingency. This is used when the buyer doesn’t trust the seller’s report. So with this contingency, you have 17 days from the time you submitted an offer to get your contractor out to inspect the home and make sure everything is as expected.

During those 17 days, you as the buyer can review all the seller’s disclosures. You can also ask the seller to do some repairs or make some concessions. The seller doesn’t have to agree to those concessions. However, you can choose to threaten to back out of the deal if they don’t.

Now, in case, there were some things that the seller didn’t disclose which you found out, then the time frame could increase.

When Shouldn’t You Use A Contingency?

Here in the Bay Area, offers tend to be so competitive. If you make an offer with a contingency, yours wouldn’t get accepted. A seller would just choose an offer that’s clean (without a contingency). So as a buyer you have to be ready that your EMD goes hard on day one.

Don’t worry though as there is a way to work around not having those contingencies in place.

Let’s say for a loan contingency. If you’re worried about not getting approved then you should work with your lender beforehand and get an underwritten pre-approval letter.

Also, another way is to buy a bit lower than your maximum purchase price range so that you won’t come across a scenario where you can’t afford the loan.

When it comes to the appraisal contingency, one way to ensure you’re not buying an overpriced property is to make sure you have your comparables. Talk with your agent. Look at how much the other houses of similar size and build are selling for in that area. This way you can make a good offer. It’ll save you from making some crazy offer that’s too high, and you won’t need that appraisal anymore.

There’s a reason some sellers don’t like having an inspection contingency. That’s because they don’t want to have their property tied up for a month then have the buyer come back and renegotiate for a lower offer for something already disclosed beforehand.

Sellers already provide disclosures and an inspection report. Plus, if you toured the property yourself, then you need to get all of those things out of the way before you even make an offer.

When SHOULD You Use A Contingency?

The scenarios I gave above only applies to the Bay Area. If you’re buying a home out-of-state or in a not-so-hot or competitive market such as Jacksonville, Florida, then it’ll be different.

When you’re in a buyer’s market where homes have been listed for 3-4 months already, you can offer below the asking price, put in all the contingencies, and even renegotiate later if you find problems in the home.

Contingencies are a great way to protect yourself and get your deposit back. As long as you know when and how to use them, buying a home shouldn’t have to be a stressful experience.