Whether you’re buying or selling a home, you’ll hear a lot about real estate contingencies the moment you’re in escrow. But what are real estate contingencies? And are they really necessary?
Here’s your quick guide to real estate contingencies.
What are Real Estate Contingencies?
Real estate contingencies are simply conditions that need to be met before the sale can move forward. There are several types of contingencies, but we’re going to focus on the five most common contingencies and how they can affect your real estate deal.
1. Title Contingency
The purpose of a title contingency is to make sure that the sellers have the legal right to sell the home.
In most cases, the title company will find that the sellers have “clear title,” which means that they have every legal right to sell. But in rare cases, there will be a “cloud on title,” which means there is something preventing the sellers from legally transferring property rights to the buyer. This could be because of circumstances like:
Delinquent property taxes
Divorce, bankruptcy, or other legal proceedings
Liens against the property (liens are financial claims that prevent the owner from selling until the liens are paid)
In many cases, clouds on title can be cleared. But the sale can’t proceed until the contingency is met by addressing the issue.
2. Inspection Contingency
Home inspections ensure that the buyer understands the condition of the property before completing the purchase. After the buyers review the inspection report, they can sign a document to confirm that they want to proceed with the deal. This signature means the contingency has been met.
If a deal-breaker is found during the inspection, buyers do have the option to back out of the deal without penalty because the contingency is not met.
3. Appraisal
Home appraisals are independent assessments of a home’s value by a licensed appraiser. The purpose of an appraisal contingency is to make sure the property appraises for an acceptable value (the acceptable value usually being a figure near the offer price).
In the hot market conditions of 2021, we’re seeing many buyers waive the appraisal contingency. This is because buyers in heavy competition are willing to spend more than market value to win the home. As long as the buyer is paying all-cash or has enough of a down-payment to cover the difference between the appraised value and the offer price, this is entirely acceptable. In fact, carefully waiving contingencies can be a good way to get your offer accepted.
4. Financing
If a buyer is using a loan to purchase the home, there will be a financing contingency to make sure the buyer is able to obtain the funding to complete the purchase. This is why sellers prefer all-cash offers; when buyers pay cash, there is no financing contingency to overcome.
Getting pre-qualified for a home loan is an important step to help avoid potential financing issues as a buyer. Buyers should always get pre-qualified with a lender before looking at homes, and sellers should generally only consider offers from buyers who have been pre-qualified.
5. Final Walk-Through
The final walk-through contingency is in place to make sure the seller leaves the home to the buyers in the expected condition. This contingency is nearly always met without any problems, but in rare cases, where there is a material difference in the condition of the home during the final walk-through, the buyer can refuse to remove the contingency until the issues are addressed.
While this list of real estate contingencies covers the most common contingencies, it’s important to note that these aren’t the only contingencies. Navigating real estate contingencies is one of the many complex tasks our experienced agents at Sequoia Real Estate manage for our clients every day. If you’re considering buying a home in the Bay Area, contact Sequoia Real Estate to be matched with a real estate professional who can make your transaction as smooth and profitable as possible.