What are real estate contingencies?
Updated: Feb 25, 2022
As a home buyer or seller you're going to definitely come across the word contingency. It's basically a 'get out of jail free' card.
You can have seller contingencies and buyer contingencies. The top three most common contingencies are inspection, appraisal and loan contingencies.
If the contingencies are fulfilled, you will then clear the contingency and proceed to the next stage of the sale or to closing. If you have some stumbling blocks along the way, these contingencies are in place to protect you, as a buyer. There are other contingencies that can also be used to protect the seller, for example if you want to ensure you can buy your next home before selling the first one.
Inspection Contingency (Spot the red flags!)
An inspection contingency allows the home buyer to investigate the property with a home inspection, roof inspection and pest inspection as well as any other inspections the buyer would like, for example a sewer lateral inspection or even getting tradesmen out to the property to explore the expenses required to make necessary repairs.
Once that's all cleared, your realtor will be able to remove that contingency and proceed to the appraisal contingency which might be around, say 10-14 days into escrow. The appraisal contingency gives time for your lender's appraiser to come out to the property and say 'yep, this home is worth the purchase price', or 'no, this home is worth less (or more) than the purchase price'. There might be a gap between the purchase price and the actual appraisal value. Then you need to decide to either make up the gap with your own funds, to re-negotiate or to even break the contract.
Then you have the loan contingency. This is different to the appraisal contingency but is basically to do with the buyer satisfying the requirements in order to get the loan.
Inspection, appraisal and loan contingencies are usually the most common ones. In the Bay Area, often you won't use all of these contingencies, if any at all but it's important to know what they are when the conversation comes up. In some areas, you will use all three contingencies, so this is why it's important to speak to your realtor about it and to make sure that you have a good understanding of what the local customs are in your area and how to use them to your advantage.
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