What Contingencies Should I Consider in My Offer?

It can take time to figure out what to do when buying a house. Having options is crucial and can help protect both buyers and sellers. Some conditions or terms must be met before a real estate deal can go through. The deal can be broken without fees if these conditions aren't met. This piece will detail the different kinds of contingencies, their importance, and how to get rid of them so that the home-buying process goes smoothly. 

What are Real Estate Contingencies/ Contract Contingencies

Contract contingencies must be met for a real estate deal to be legally binding. Parts of real estate contracts called "contingencies" let buyers and sellers back out of the deal if certain conditions are unmet. These conditions must be met to protect both parties and ensure that the whole home-buying process is finished to everyone's satisfaction.

Types of Real Estate Contingencies

Financing Contingency

A financial contingency, also called a mortgage contingency, lets the buyer back out of the deal if they can't get the money they need. This section usually gives the buyer a certain amount of time to get a mortgage. The buyer has up to this point to get financing. If they can't, they can back out of the deal and generally get their earnest money deposit back.

Why it’s important - It keeps people from being legally bound to buy a house even if they don't have the money.

How to manage - Before making an offer, buyers should ensure they can get a mortgage. This can make their deal more appealing to sellers.

Inspection Contingency - The inspection reserve lets the buyer look professionally at the house within a specific time. If significant problems are found during the check, the buyer can request repairs, renegotiate the price, or back out of the deal.

Why it’s important - This keeps the buyer from buying a house with hidden problems that need expensive fixes.

How to manage - Set up a professional home inspection as early as possible to give yourself time to negotiate or decide.

Appraisal Contingency - A buyer can back out of the deal if the property appraises for less than the purchase price. This is called an assessment contingency. Lenders usually only give the home's appraised value, so this condition ensures the buyer doesn't pay too much.

Why it’s important - It prevents buyers from getting stuck with a loan higher than the house's value, protecting their money.

How to manage  - Ensure that the offer price aligns with similar houses in the area. This will lower the risk of an appraisal being too low.

Title Contingency - A title contingency, also called a title review contingency, lets the buyer review the property's title to ensure there aren't any legal problems, like liens, encumbrances, or disagreements over who owns the property. If problems are found, the customer can ask for them fixed or back out of the deal.

Why it’s important  - The buyer will be sure to have clear ownership of the house without any legal problems.

How to manage - Hire a reputable title company to do a full title check early.

Insurance Contingency - As a condition of the deal, the buyer must be able to get homeowner's insurance for the house. The buyer can back out of the deal if they can't get insurance.

Why it's important - It ensures the buyer can get insurance on the house and protect their investment.

How to run things - Contact insurance companies early to ensure the property's coverage and learn about potential problems.

Home Buying Contingencies

Customizing Contingencies to Meet Individual Needs: When buyers include conditions in their deals, they should consider their unique needs and circumstances, ensuring they are met and protected.

Additional Contingencies to Consider

Sale of Stocks to Purchase a Home - Using proceeds from the sale of stocks to fund a down payment on a house can often be a wise financial decision. Real estate is one of the few investments that has historically outperformed the stock market over the long term. With home prices continuing to rise in many markets, putting a sizable down payment on a property can be a strategic move to build equity and avoid paying private mortgage insurance. That said, it's important to keep in mind the tax implications of selling stocks. The IRS considers any profits from the sale of stocks to be capital gains, which are subject to taxation. Depending on how long the stocks were held and the taxpayer's overall income level, these capital gains may be taxed at a rate as high as 20%. So, while using stock sale proceeds for a down payment can make good financial sense, it's crucial to plan ahead and account for the tax bite when determining how much can realistically be put towards that home purchase. Overall, in many cases the benefits of leveraging stock market gains to get a foot in the door of the real estate market can outweigh the tax costs, provided the homebuyer is aware of and prepared for those tax obligations upfront. With home ownership offering the potential for significant long-term wealth-building, making smart use of investment assets like stocks to facilitate that first home purchase can be a savvy financial strategy. You’ll have to allow time to complete the sale and have finances available.

Sale of the Buyer's Home - A sale clause can be added if the buyer needs to sell their current home before buying a new one. This way, they won't have to worry about the costs of having two homes at once. Options for a Smooth Transition Between Selling and Moving into Your New Home.

Homeowners Association (HOA) What to Do If - When buying a home governed by an HOA, buyers may include a condition that they read and agree to the HOA documents. This way, buyers can be sure they know about any rules, fees, or restrictions that come with the property.

The Process of Removing Contingencies

Getting rid of the conditions that hold up the purchase is an essential part of buying a house because it means the buyer is happy with everything and is ready to proceed with the deal. This step is called "contingency removal" or "contingency release."

Figuring out the Timeline - For each one, the buyer will have time to either remove the risk or back out of the deal. It's important to remember these times and ensure that everything must be done is done on time.

Meeting the Conditions - To remove a condition, the buyer must be sure that it has been met. For instance, if there is an inspection contingency, the buyer would have to do the inspection and talk to the seller about any fixes that need to be done. Once the buyer is happy, they can officially remove the condition.

Sending in a Form for Contingency Removal - In most real estate deals, the buyer must give the seller either a written notice or a form called a "contingency removal notice" to show that the condition has been met and taken away. This form is added to the written contract paperwork.

Going into more detail if needed - If the buyer and seller can't fully agree on the terms of a contingency, they may need to discuss it again. For instance, if problems are found during a check, the buyer could ask for repairs or a lower price. These talks should be over before the date for the contingency removal.

Risks and Benefits of Removing Contingencies

Benefits

Better Offer - Taking away conditions can make a buyer's deal more appealing to sellers, especially when there are a lot of offers. People who are selling often like deals with fewer conditions because they think they are safer.

Less tense transactions - Fewer outcomes can speed up the transaction process and lower the chance of delays or problems.

Having more certainty - For buyers, an offer with fewer conditions makes them more confident that the sale will go through without problems.

Risks

Risk to Money - Getting rid of options too soon can put the buyer at risk of losing money. For instance, the buyer may lose their earnest money payment if the financing condition is removed, and they can't get a mortgage.

Problems Not Expected - If buyers don't have the option to view the property first, they might buy a house with significant problems that will cost a lot to fix.

The market situation - In a seller's market, buyers may feel pushed to eliminate conditions to compete with other offers. This could cause them to miss out on essential defences.

Strategies for Managing Contingencies

Get a mortgage loan before you apply. - Pre-approval lets sellers know that you are a serious buyer and lowers the chance that you will have problems with financing. You can also shorten or eliminate the financing contingency time, making your offer more appealing.

Do preliminary inspections - When there is a lot of market competition, some buyers do checks before making an offer. This lets them make deals without waiting for an inspection since they already know how bad the property is.

Find out about the market - Knowing how the local market is doing can help determine which contingencies are necessary and which can be changed. You might need to be more open in a hot market, but you can be more careful in a buyer's market.

Work with professionals who have experience. - A real estate agent, lawyer, or mortgage broker who knows their stuff can give you sound advice on which situations to include and how to handle them. Their experience can also help you negotiate and meet your needs.

Get ready to talk things over - Sometimes, the buyer and seller have to negotiate because of conditions. Be ready to talk about and agree on terms, whether it's calls for repairs after an inspection or price changes after an appraisal.

Conclusion

Conditions are critical when buying a house because they protect both sides and ensure everyone does what they must before the deal is finished. Buyers can make intelligent decisions and navigate the confusing process of buying a home if they know about the different types of contingencies and how to get rid of them. When buyers carefully handle contingencies and work with professionals who know what they're doing, they can protect their investments, avoid problems they didn't expect, and improve their chances of a good home purchase. It doesn't matter if you're an experienced investor or someone who is buying their first house. You can plan your trip to buy a house well if you know a lot about what could go wrong.

 

Paul Burrowes, CRS, CCEC, SFR, NHCP, LHC, REALTOR® Licensed REALTOR® with over 15 years of experience and expertise.  Commits to being on time and transparent. Acts as your consultant to ensure you make the best decisions to fit your transaction at every step in the process. Negotiates towards a low stress, win-win outcome. Handles all the details for you, ensuring the hundreds of steps in your real estate transaction go smoothly. Proudly serving Silicon Valley, Santa Cruz, Monterey, and Santa Clara Counties!  | DRE# 01955563 | (831) 295-5130 | paul@burrowes.com | About Santa Cruz and Northern California Real Estate