One one the most common things you’ll find in a real estate offer is a contingency. This post will define what a real estate contingency is and how it works. It will also explain the most common ways contingencies are used in real estate sales.
First, let’s start with a definition. A real estate contingency refers to a condition that has to be fulfilled prior to the sale of a home. Contingencies are put into place as safety nets for you and your potential buyer.
Real Estate Contingencies Typically Fall Within Three Categories:
- Home Inspection:
This contingency allows buyers to get the property they intend to purchase inspected prior to fully committing to moving forward.
This contingency allows buyers to have the property they intend to purchase appraised, which means they have the opportunity to have a home valuation professional come in and determine what the real value of the property is. This contingency both helps the buyer feel secure in the amount of money they’re offering for the home, and it allows the lender to make sure they aren’t overpaying for the property.
- Mortgage Approval:
This contingency is put into place to protect buyers who must obtain financing to complete their home purchase. If the lender doesn’t approve their loan, they buyer can back out without penalty.
How Long Do Contingencies Apply?
Since earnest money is forfeitable until these contingencies are lifted by the buyer, there has to be a set period of time that a buyer has to meet all the necessary requirements. That period of time is called a contingency period. In a real transaction, the contingency period begins as soon as a seller accepts a potential buyer’s offer.
As an example, in California, the contingency period for inspections and appraisals is typically 17 days. Therefore, if you accept the buyer’s offer on May 1, the contingency removal date would be May 17. There is one exception, however. Obtaining a loan got a lot tougher after the real estate crash, so unlike other contingencies that fall into the 17 day period, this one most often lasts 21 days or until the buyer is able to secure their loan. The offer itself spells this out.
You have the option to shorten this period in your real estate offer, and it can be a good idea to do so if you’re working with a well-qualified buyer.
What Can Cause a Sale to Fall Apart?
If your potential buyer is unable to obtain adequate financing, your home appraises lower than expected or a home inspection reveals some type of major problem that you’re not willing to fix or make a concession on, your buyer has a right to back out of their contract without being penalized.
All that said, there are always pitfalls to backing out of an escrow-in-progress. The biggest one is that it’s a major time setback. Buyers will have to start over with a new transaction, and sellers lose valuable marketing time and have to find another buyer.
What Ends a Contingency Period?
On or before your contingency removal date arrives, your potential buyer must submit a contingency removal form, indicating their desire to proceed with closing and purchase your home.
If this doesn’t happen by the contingency removal date, you have the right to serve your buyer with a Notice to Perform. Once served, your buyer must either back out of the contract or remove the contingencies and move forward with the sale.
Now that you understand what a contingency period is and how it impacts your home sale, you can head into escrow with confidence!
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