Many homebuyers are waiving contingencies to ensure they win their ideal property in the current seller’s market. Removing contingencies as requested by the seller makes you more likely to succeed in a bidding war and obtain the home, which can be challenging to achieve in such a tight market.
Although this technique can give you the edge when buying the house of your dreams, waiving contingencies can also lead to multiple problems down the road. Find out which contingencies you should always do when buying a home and why you should never waive them during the process.
What is a Contingency?
A contingency is also referred to as a contingency clause in real estate. Contingency clauses are placed in the real estate sales contract and layout actions or conditions that the buyer and seller must fulfill for the purchase agreement to become legally binding.
Contingencies exist to protect both parties during the sales transaction. They allow the buyer and seller options to back out the contract if certain conditions are not met. They also ensure the homebuyers have time to secure financing and are entitled to a home inspection before purchasing the property.
The sales agreement becomes a legal contract if both parties agree to fulfill the contingencies. Neither party can back out of the sale at this point. However, if one party does not satisfy the contingencies in the contract, it becomes null and void.
Contingency clauses can cover almost any aspect of selling a home. However, there are a few types of contingencies that most sales contracts include.
A financing contingency allows the buyer a set amount of time to secure financing to purchase the property. This contingency lets the buyer back out of the contract if they cannot obtain a mortgage or other funds to buy the home. If the buyer cannot buy the house but fails to notify the seller or ask for an extension, the seller can sue the buyer for breach of contract.
Appraisal contingencies exist to protect buyers from paying too high above the home’s value. Part of the home buying process includes performing a home appraisal on the property. An appraisal places a monetary value on the home based on market analysis data and determines mortgage approval amounts.
Generally, an appraisal contingency says that the buyer can terminate the contract if the home is appraised below a minimum value.
Home sale contingency
A home sale contingency protects buyers trying to sell an existing property before securing financing for the new purchase. Under this type of contingency, you can terminate the contract if you cannot sell your other home.
Sellers are also protected under this contingency. Typically they can back out of the sale if the buyer cannot sell their other property within a specified amount of time. However, a home sale contingency can also create a risk for sellers. They must wait the specified amount of time for the buyer to sell their other property, which means if the sale falls through, they have lost out on other potential buyers.
Home inspection contingency
A home inspection contingency ensures the buyer’s right to have the home inspected by a professional agency within a set time frame. The contingency also allows for negotiation between the buyer and seller as to what potential inspection findings are grounds for contract cancellation and who is responsible for making repairs.
Sometimes a sub-contingency called a cost-of-repair contingency is added to this clause. It specifies that the buyer may terminate the contract if the total amount of necessary repairs exceeds a set amount.
Which Contingencies Should You Never Waive When Buying a Home?
Waiving contingencies during the homebuying process is a way for buyers to compete in a seller’s market. It is especially tempting to find the perfect South Florida home and want to move fast to buy it.
For your protection, however, it is essential never to waive contingencies that inhibit your rights when buying a home.
Home inspection contingency
As a homebuyer, you should never waive your right to a home inspection. The home inspection contingency allows you to discover potential problems in the home, from minor repairable concerns such as paint or flooring to structural or electrical issues that can make your home uninhabitable if not addressed.
To avoid buying a home with costly, potentially unfixable issues, insist on a home inspection contingency in your sales contract. Pay special attention to sub-contingencies such as mold remediation and well water or septic tank inspections. If the inspector finds mold or problems with your septic tank, it could cost you thousands to properly address the issue. Ensure these contingencies are included in your contract so you don’t end up with a substantial financial and safety burden on your hands.
Even if you have pre-approval from your mortgage lender, it is not wise to waive your financing contingency. Without the financing clause, you risk breaching the contract if an unforeseen obstacle arises during the financing process. This can have devastating consequences on our financial security. It can also adversely affect your future ability to secure financing.
Insist on including a financing contingency in your contract to protect yourself if your financing plans fall through.
Avoid waiving your appraisal contingency when buying a home. Without an appraisal clause, you may be on the hook for the entire offer amount even if the home’s appraisal comes back significantly lower than expected. This can put you in an adverse financial position and interfere with your financing if the lender no longer feels comfortable with the mortgage risk.
Always insist on an appraisal contingency to protect yourself from ending up in an upside-down loan situation.
Work with a Knowledgeable Realtor
When buying a home, it is helpful to work with a knowledgeable realtor who can navigate the ins and outs of sales contract contingencies. Partner with South Florida realtor Bryan Gold to ensure you get the property you want while maintaining legal protection during the process. Contact Bryan today at (954) 464-3459 or firstname.lastname@example.org.