Today’s real estate word of the day – contingency, is one you’ll want to know and understand when it comes to drafting your purchase agreement. Sellers and buyers often add addenda to the purchase agreement, and both parties must agree to the addenda before signing this legally binding contract.
Buyer contingencies addenda
Buyer contingencies are one of the most common addenda. Contingencies dictate certain conditions which must be met for the contract to go through. For example, a buyer might request that the well be inspected and repaired before closing the sale. Here are a few types of buyer contingency addenda you may encounter in an offer
Inspection contingency
Sometimes called a due diligence contingency, an inspection contingency addendum allows the buyer to back out of the contract if the home inspection does not come back as expected. The buyer may request the seller to complete necessary repairs or offer money to cover the repairs. If the seller refuses, this addendum gives the buyer the right to terminate the contract with their earnest money intact.
If the buyer has accepted the property after the inspection, he will add an addendum that releases the inspection contingency to serve as an official record.
Even though it’s not a formal addendum, agents draw one up stating that the buyer accepts the property in its current condition and hereby releases the inspection contingency of the contract.
If the buyer forgoes the inspection all together, the seller should include a property condition disclosure that declares the buyer accepts the property as-is. Depending on how hot the market is, buyers will often choose to waive the inspection.
Appraisal contingency
Like an inspection contingency, an appraisal contingency allows the buyer to exit the deal if the appraisal comes back at a lesser value than the purchase price. This addendum protects buyers from overpaying for homes and getting trapped in a contract for a home they can’t afford (a lender won’t approve a mortgage for more than a property is worth).
This contingency is less common in a seller’s market where more buyers pay for homes in cash to beat the competition. It’s not uncommon to see buyers forego the appraisal and they’ll come up with the difference if the appraisal doesn’t come in at the contract price.
Financing contingency
This type of addendum is also known as a mortgage contingency. It protects the buyer in the case they cannot secure financing from a lender. Most financing contingency agenda include a time frame during which the buyer must secure financing. If the buyer fails to do so, they can collect their earnest money and leave the deal.
There are specific addenda for buyers financing their homes through government loans from the Federal Housing Administration of Veterans Affairs. Because these loans usually have particular terms and requirements that the buyer must meet before approval, they also require different addenda than a conventional mortgage would.
Home sale contingency
If a buyer is selling their home simultaneously, a home sale contingency states that they will purchase the seller’s home if and only if their home sells first. This addendum gives the buyer some leeway in settling their old property and financing their new one. Similar to the financing contingency, the addendum will state a specific time frame for the buyer to sell their home and go through with the purchase agreement for the new home.
Home sale contingencies are more prevalent during a buyers’ market where buyers have more leverage in negotiating the terms of the sale.
My hopes are that today’s real estate word of the day – contingency helps you along your real estate journey. The good news is that you do not have to navigate the waters of real estate alone. Working with a trusted and experienced realtor makes all the difference in the world. Contact me here to begin a conversation and I would love for you to follow me on Facebook and Instagram.
