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By definition, a contingency is a provision for an unforeseen event or circumstance. Contingencies can be a daunting task that should be avoided to get the deal done. This discussion is going to walk you through the primary home offer contingencies that you should consider when buying a home.
Once armed with the information behind contingencies, it’ll be less daunting and easier to navigate when buying your home.
We’ll go through:
– Who benefits from the contingencies?
– The primary home offer contingencies including
o Inspection contingency
o Appraisal contingency
o Financing contingency
o Condominium, HOA, & cooperative 3-day doc review period
Who Benefits From Contingencies
Who benefits from a contingency depends on who you are in the home buying process; the buyer or the seller. Most of the primary home offer contingencies you hear about are there to benefit you as the buyer.
Within a competitive market, contingencies need to be used strategically to put you in the best possible position to have the seller accept your offer. The four primary home offer contingencies we have in the sales contract are the following:
● Inspection Contingency
● Appraisal Contingency
● Financing Contingency
● Condominium, HOA, and Cooperative 3 Day Document Review Period
All contingencies if enacted would benefit you as the buyer, but when a seller has other offer options removing these contingencies can benefit you. We are going to explain each contingency as well as the pros and cons of each.
The Primary Home Offer Contingencies
Inspection Contingency
Arguably one of the most memorable home buying moments will be the home inspection. It is an incredible opportunity to learn about the home that you’re purchasing and if you have a great inspector, they can teach you a tremendous amount about the home; From maintenance to simple operations within your home that you might not know as a buyer.
Pro tip: our team has relationships with great home inspectors that we can recommend and schedule when needed.
A home inspection is a limited, non-invasive examination of the condition of a home, completed during the home sale process. Home inspections are usually conducted by a home inspector who has the training and certifications to perform such inspections.
*We recommend that all of our clients complete a home inspection.
Based on how competitive the property is will dictate at what point we complete the home inspection. In general, the two options are as follows:
Option 1: After Your Offer is Accepted by the Seller:
In a balanced real estate market, traditionally home inspections are completed once the seller and buyer agree to offer terms. I.e. after a ratified contract. The buyer would then have an opportunity to negotiate or cancel the contract.
Positives:
● You know you have the home under contract
● There is less pressure to complete the inspection quickly
● You have a general understanding of what you can ask for based on the accepted offer. (We will discuss this more in the Inspection Contingency Options Section)
Negatives:
● If the property is competitive and the other offer has no inspection contingency you might not have your offer accepted with this contingency
Note: In a competitive market, pre-inspections on the standard
Option 2: Before You Submit Your Offer:
You can complete a home inspection before you submit your offer. In a competitive offer situation, this can increase your chances of getting the home under contract. Pre-Inspections give the seller peace of mind that they don’t have to worry about making repairs.
Positives:
● Your offer is stronger than offers with a home inspection contingency which Increases your chance of having your offer accepted
● You know more about the home when you are initially submitting the offer so that you can make a more informed decision
Negatives:
● Fast turnaround time to find an inspector to beat the offer deadline on a property. *Through our network we can find someone generally that can complete an inspection within 48 hours of the request.
● Possibility of multiple pre-inspections. If your offer is not accepted there is a chance that you might have to complete pre-inspections that can add up in cost over time.
Types of Inspections and the cost:
Full Inspections: A full inspection is one of the best ways to gauge the condition of a home. The inspector will review and document everything in the home from the basement to the roof.
● Typically takes from 2-4 hours to complete
● Cost range:
○ $350+ For a Studio to 2 Bedroom Condo
○ $600+ For a House (The average 3-bedroom row house will cost $600)
● You will receive a report at the end of the inspection
Walk and Talk Inspections:
A walk and talk are commonly used during pre-inspection when you haven’t gotten the home under contract. They are not as detailed as a full inspection.
● Typically last 1 hour
● Cost range: $200-$400
● You don’t receive a report at the end
Component Specific Inspections: If you have a specific item you would like to look into with more detail then. We can turn to a trade specific inspection and an example would be a structural engineer inspection. The cost of these inspections range from 100 dollars up to thousands.
The Home Inspection Contingency Details
One of the most heavily weighted contingencies in the home purchase contract is the home inspection contingency. This contingency if activated can give you two rights:
Found within the Addendum of Clauses A, the inspection contingency is one of the most heavily weighted contingencies within the contract.
The contingency itself is very straightforward with two key pieces of information that we need to provide:
- How many days you would like for the contingency to last typically this is five days or less. In general sellers want this as short as possible.
- Deciding if you would like the right to negotiate and/or the right to cancel.
- The Right to Negotiate– Gives you the right to negotiate repairs or credits. Examples:
- Repair door handle in bathroom
- Replace broken microwave
- Provide 50-dollar credit to replace broken light switches
- The Right to Negotiate– Gives you the right to negotiate repairs or credits. Examples:
- The Right to Cancel- Gives you the right to terminate the contract based on your findings from the home inspection
Note: The inspection contingency is not used to request cosmetic changes or as leverage to reduce the sales price for issues disclosed prior to the offer being submitted.
Appraisal Contingency
Within the home buying process, the appraisal contingency is one of the areas where an experienced team can mitigate the majority of the risk while an inexperienced team can put its clients in an awkward situation to say the least.
To start an appraisal is defined as an unbiased professional opinion of the value of a home and is used whenever a mortgage is involved in the buying, refinancing, or selling of that property.
In a purchase-and-sale transaction, an appraisal is used to determine whether the home’s contract price is appropriate given the home’s condition, location, and features. In a refinance transaction, an appraisal assures the lender that it isn’t handing the borrower more money than the home is worth.
When you are getting a mortgage on a home, the lender needs to ensure that they can recoup the funds they are providing for the purchase if the buyer defaults.
The Home Appraisal will be completed by a licensed appraiser ordered from an approved 3rd party list by the lender you select.
Appraisal Cost
The average appraisal in the DMV costs around $400-$600 and is charged to the buyer. Normally the appraisal will need to be paid upfront, to ensure that there is no bias to make the home a specific value. Some lenders will allow you to roll the appraisal costs into your closing costs.
When Are Appraisals Completed?
Your lender will order your appraisal once they receive a ratified contract. Appraisals are typically completed within 21 days. You will not be present for the actual appraisal.
A property’s appraisal value is influenced by recent sales of similar properties and by current market trends. The home’s amenities, the number of bedrooms and bathrooms, floor plan functionality, and square footage are also key factors in assessing the home’s value.
The appraiser must do a complete visual inspection of the interior and exterior and note any conditions that adversely affect the property’s value, such as needed repairs.
Typically, appraisers use the Uniform Residential Appraisal Report. The report asks the appraiser to describe the interior and exterior of the property, the neighborhood, and nearby comparable sales. The appraiser then provides an analysis and conclusions about the property’s value based on their observations
The report includes:
● A street map showing the appraised property and comparable sales used
● An exterior building sketch
● An explanation of how the square footage was calculated
● Photographs of the home’s front, back, and street scene
● Front exterior photographs of each comparable property used
● Other pertinent information—such as market sales data, public land records, and public tax records—that the appraiser requires to determine the property’s fair market value
Home Appraisal Contingency
The Home Appraisal Contingency gives you flexibility if the home is not appraised at a value equal or greater than your offer. If the home “under appraised” you would have an opportunity to negotiate or cancel the contract
Below are examples of an ideal situation where the home appraises at or above the contract price. (Which is what we want!)
| Example 1: Appraised At Value |
| Price In Contract: 500K |
| Appraised Value: 500K |
| In this instance the appraisal came in at value. With or without an appraisal contingency you are clear to move forward in the purchase. |
| Example 2: Appraised Above Value |
| Price In Contract: 500K |
| Appraised Value: 527K |
| In this instance the appraisal came above value. With or without an appraisal contingency you are clear to move forward in the purchase. |
Homes can appraise below value and for many home buyers this causes a large amount of stress. Thankfully, if you have an appraisal contingency you will have multiple options.
Note: Just because an appraisal comes in below value. Does not mean you are getting a bad deal or even overpaying. On any given day an appraisal can vary by 3%.
| Example 3: Appraised Below Value with an Appraisal contingency |
| Price In Contract: 500K |
| Appraised Value: 475K |
| In this instance the appraisal came in below value. With an appraisal contingency you have the following options: 1. Accept the Appraisal and cover the difference out of pocket i.e. 25K2. Ask the seller to lower the purchase price3. A combination of 1 & 2. The seller could reduce the price and you could bring more cash to the settlement to cover the difference. |
| Example 4: Appraised Below Value without an Appraisal contingency |
| Price In Contract: 500K |
| Appraised Value: 495K |
| In this instance the appraisal came in below value. Without an Appraisal contingency you would be required to bring an extra 5K to settlement to cover the difference. |
Is Waiving an Appraisal Contingency Right for You?
Waiving your Appraisal contingency is a great way to make your offer substantially more appealing to sellers. With that said, waiving this contingency needs to be done with caution.
The most important factor to waiving for your Appraisal contingencies is understanding the worst-case scenario.
This depends completely on where you stand financially. More specifically, how much cash you have on hand. If you are going to waive your contingency you will need to ensure you can cover the gap in sales price to appraisal price.
Financing Contingency (Mortgage Contingency)
The financing contingency gives the homebuyer time to obtain financing for the home. This piece adds an important piece of protection for the buyer as they’ll be able to back out from the contract and obtain their earnest money if they’re unable to get financing from a mortgage lender.
Within the contingency you’ll be able to specify a number of days to gain financing. This gives the buyer control as they’ll be able to terminate (or potentially extend) the contract.
From a control standpoint, in a highly competitive market, the financing contingency will make it difficult to get an offer accepted so should be used with caution. In some instances, depending on your offer, the financing contingency can be a great tool for the homebuyer.
Condominium, HOA, & cooperative 3-day doc review period
The three day association document review period gives buyers a chance to dive into the details of the association. During that period if there are items that you are not comfortable with then your agent will get answers from the association on your behalf.
The most valuable aspect of this contingency is it allows you to cancel the contract while getting your EMD back. So for any reason you can cancel the contract in that three day period and walk away with your EMD in hand!
Leveraging Home Offer Contingencies
Home offer contingencies are meant to help the buyer gain some more control over the process and ensure that they get their desired outcomes.
When used effectively, home offer contingencies will greatly protect you as the buyer while ironing out the details of the home.
It’s best to work with your Realtor in these cases as they’ll help you determine the contingencies you should and shouldn’t consider based on factors such as:
- Who the seller is
- What the market conditions are
- Where the property is located
If you’re looking to understand more, or want help implementing home offer contingencies into your next offer, book a consultation with one of our experts.
