What you must know about Real Estate Contingencies

Posted by Caroline Hobbs on Thursday, February 27th, 2020 at 1:21pm.

You finally found the perfect house and you’re getting ready to enter into a contract to buy the house. As a first time buyer, you may be wondering to yourself about your purchase contract and what protections you have as a buyer.


What are contingencies?

Contingencies are clauses in the contract that require both parties to meet certain conditions that must take place within a specific amount of time in order to continue to the next phase. Think of them as prerequisites to getting what you want. They are there to protect you as a buyer and can help you walk away without any monetary losses.

Buyers can remove contingencies in the contract to lift the restraint and proceed with the sale by completing a contingency removal form. If they’re not removed, they may stay in effect until they are removed or buyers have been served with a Notice to Perform. 

You may have heard a friend mention that they had to make a non-contingent offer. In a competitive market, buyers may agree to forego contingencies in an effort to make their offer more attractive to the sellers.  Removing the contingencies does come with its own set of risks. For example, should something come up and you are unable to obtain the loan, without the loan contingency in place, your deposit is at risk should you need to pull out of the contract. 

There are three contingencies in the California purchase agreement: the loan contingency, appraisal contingency, and an inspection contingency.

Loan Contingency 

The purchase contract enables you to have loan contingency, allowing a period of time to obtain the necessary financing to close the offer. The contingency is then removed once the buyer receives loan approval. But if your loan approval falls through, having loan contingency in the contract is your ticket out. The contract can be canceled without you losing your earnest money deposit.

In a different situation where you decide to purchase a home with cash, there is no need to include this contingency in the contract. Cash offers are exceedingly attractive to sellers since they do not need to wait for a buyer to secure financing and can typically close in as little as 7-10 days.

Appraisal Contingency

The California Association of Realtors defines an appraisal as: "An opinion of the market value of a home expressed by a real estate appraiser." 

This contingency allows you to cancel escrow without sanction if the appraiser decides that the price of the property is worth less than the purchase price. In these cases, having the contingency will also give you a leg-up in renegotiating the sales price with the sellers.  As a buyer, you must understand that an appraisal, whether you have included this contingency in the contract or not, is an opinion of the value of the property and the bank will only lend based on the appraised value. 

If the appraisal is low or less than the purchase price, it does not necessarily mean that the sale has fallen through. By removing the appraisal contingency, you are simply agreeing to make up the “gap” amount in cash (in addition to your down payment). This means that the cash down payment is increased to cover the difference in the appraised value and the purchase price. EX: If you offer $800,000 for a home and the appraisal comes in at $790,000, then you would need to put down $10,000 + your planned down payment.

It is also possible to dispute the appraisal value if it does not come in at the price you expected. If there is an error in the report, this may give you more leverage to negotiate and adjust the price. You may submit additional sales you feel comparable which may have been omitted. This process goes through the bank and may or may not have an impact on the appraised value.

Inspection Contingency

You don’t want to buy a house that looks great on the outside but hides thousands of dollars worth of repairs on the inside, right?

This contingency allows buyers time to “inspect” all aspects of the property which may affect its overall value. Physical condition is only one aspect covered by the inspection contingency. Buyers may also consider researching the neighborhood, schools, natural hazards, commute times, etc. If the property fails to meet the buyer’s expectations, they would then have the ability to back out of the purchase. 

If you’re ready to take the next big step in your life please give me a call today!

Caroline Hobbs

650-440-0050 / Caroline@RewardRealty.org

DRE# 01901869

If you have questions, feel free to leave a comment below!


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