What Are Home Buying Contingencies?
In many cases, there are contingencies that limit what a home buyer is willing or able to do as part of a home sale. These are called “contingencies,” and can be a useful part of the purchase contract. Buyers who understand how to use contingencies can protect their assets during the home buying process.
What Is the Purpose of a Contingent Offer?
When a buyer makes a purchase offer on a home, the offer typically includes an earnest money deposit, which might be 1-2 percent of the home's value. Depending on the price of the home, the deposit could represent several thousand dollars or more of the buyer's cash assets. Although an escrow company usually holds onto these funds for safekeeping during the process, buyers can still lose the money if they fail to meet the terms of the purchase contract they sign with the seller. Buyers often add common home buying contingencies to their purchase offers to protect them from losing their deposit, if some possible occurrence renders them unable to purchase the home.
Which Home Buying Contingencies Are Common?
Although buyers can put a wide variety of contingencies into their offers, there are several that are considered standard. They include:
- Home Inspection and Appraisal contingencies, which depend on the results of the inspection and a fair appraisal price
- Sale and Settlement of the buyer's current home
- Mortgage Financing contingency, to give the buyer time to secure funding
- Homeowners Association contingency, so that the buyer can examine the HOA rules before they have to commit
If a seller accepts an offer with specific contingencies, the buyer has the ability to walk away from the purchase without losing the deposit, in the event a contingency is unmet.
Are Sellers Obligated to Accept Contingent Offers?
Making a purchase offer is only the first step in creating a short-term working relationship with a Collierville home seller. The seller has the option to accept the offer, make a counter-offer with a different price or contingencies, or reject the offer outright. Sellers are not required to take offers that have contingencies, but most contingencies are sufficiently common that sellers could be dramatically limiting the pool of potential buyers by refusing to consider contingent offers. For example, an appraisal contingency is typically demanded by the mortgage lender, to ensure that the home is not worth significantly less than the agreed sale price. However, buyers should be careful to ensure that they have placed appropriate contingencies into the offer in the first place. Sellers are not obligated to honor any contingencies not stipulated in the offer.
What Happens if the Contingencies Are Unresolved?
The way an unmet contingency is handled depends on the contingency itself, but in most cases, there is some wiggle room between buyer and seller. If a home inspection returns some serious concerns about the home's condition, the seller can counter with a willingness to make fixes or provide an allowance for the buyer to pay for them. A low appraisal may inspire the seller to renegotiate a new contract with the buyer at a more appropriate price. If buyers and sellers cannot reach agreement over an unmet contingency, the buyer often can retrieve their deposit and look for other homes to buy.
Buying a home can be a complicated process in which the home buyer must ensure they are protected from the very beginning. By setting home buying contingencies in the purchase offer, a buyer can advocate for their interests before they get too invested into one property.