Looking at the most common real estate contingencies and how buyers can use them
When you buy a home, you’ll need to agree on more than just the price of the property. Each real estate transaction has a contract for both parties to sign that outlines the terms of the sale. Some of these terms are called contingencies, because the sale may be contingent on whether or not these terms are met.
Contingencies make sure that both people in a real estate transaction are on the same page about what the other expects to receive in the sale. And because contingencies are part of a legal contract, if one or more aren’t met, either party has a way to back out of the sale. Without contingencies, there wouldn’t be much to hold a buyer or seller to their word once an offer is accepted.
We’ll discuss the common contingencies found in real estate transactions and what they mean for you as a buyer.
What is a contingency?
Contingencies are actions or requirements that must be met in order to finalize the sale of a home. Generally, contingencies protect the buyer, which can make an offer less enticing to sellers.
Real estate agents don’t recommend you waive any contingencies at the time of an offer, though the fewer the contingencies the more enticing an offer is. That’s why Flyhomes backs your offer with a buyer’s guarantee so both you and the seller are protected.
Let’s review the different types of contingencies and how your Flyhomes Agent can help.
The investigation—or inspection contingency—says that the buyer will only move forward with the purchase when they finish a satisfactory home inspection. It also gives you the right to terminate the contract or ask for seller concessions (repairs or credits) if you’re dissatisfied with the inspection’s results. Keep in mind the seller may not agree to seller concessions.
Buyers can also inspect other aspects of the home like zoning, insurance, and permits. In short, it helps you identify any potential issues up front.
Sellers don’t always love this contingency. It can slow the transaction down, cost them money, or turn up something in the property that makes the home less valuable. To expedite the process, some sellers offer a pre-inspection report—but not all of them. And if you insist on an inspection contingency in your offer, sellers in competitive markets may pass altogether.
Waiving this contingency may make your offer more competitive, but keep in mind that without it, material defects in the home may not be identified before closing. Your Flyhomes Agent can discuss your options in detail before submitting your offer and can find ways to protect you with our Buyers Guarantee, no matter what you decide.
Until both the buyer and seller’s funds are in escrow, your financing isn’t guaranteed. A financing contingency means you can terminate the contract if you are ultimately denied the loan amount needed to buy the home.
Other financing hurdles aren’t included in this contingency, though. A low appraisal, title issues, dependency on gift funds, inability to pay for your down payment, and closing costs are not protected.
If there’s an issue qualifying for a loan, the seller will typically require a written denial letter from the buyer’s lender.
The best way to achieve the most financial certainty as a borrower is to get pre-underwritten before you make an offer. This is one step above pre-approval, because it means that the lender has already combed through your entire financial situation in detail.
Flyhomes will pre-underwrite you to determine if you qualify for our Cash Offer or Traditional Offer. That way we can back you and guarantee the seller the funds—and waive the financial contingency altogether.
Keep in mind that pre-underwriting qualifies the buyer, not the property. The lender would still need to ensure the property itself is loanable, so double-check with your lender that the lender can loan on the property before going under contract.
Chat with your Flyhomes Agent to learn more about your options.
A low appraisal means your lender will give you less money and leave it up to you to make up the difference. An appraisal contingency allows you to terminate the contract if the appraisal comes back lower than the purchase price.
Without this contingency, you might face a higher down payment, or be unable to close altogether and may lose your earnest money. You might also need to change the loan type or face an increased interest rate to help make up the difference.
Keep in mind, appraisals are subjective, and low appraisals cannot be avoided 100% of the time. Buyers should bid within a reasonable range within the price analysis in order to minimize the risk of a low appraisal.
We’ll provide you with a price analysis so you and your agent can understand the fair market value and price range of the property to avoid low appraisals.
This contingency allows you and your agent to review the property’s title for easements, covenants, or restrictions that may affect your intended use of the property. For example, if you’re wanting to build on the property, but there are pre-existing conditions that would prevent you from doing so, you’ll want to know upfront. And, if the seller doesn’t resolve your concerns with the title, then you can terminate the contract and potentially get your earnest money returned.
Your Flyhomes Agent will have the title reviewed in advance to ensure that you’re aware of any title issues.
HOA and resale contingency
A homeowners association (HOA) can dictate a lot about what you can and can’t do with your property. The governing documents of an HOA tell you about their rules, regulations, and restrictions. This contingency states that you and your agent have enough time to go through the documents and review the financial condition of the HOA itself, since you’ll be paying into it every month.
The HOA documents may also show if there’s litigation or financial risks to the HOA, which may result in steep special assessments to you, the homeowner. Some lenders will not lend on HOAs with litigation or financial issues.
If you disapprove of the permitted uses, or of the condition of the HOA, you’ll be able to terminate the contract.
Without this contingency, a buyer might fail to identify any HOA restrictions before closing.
Some sellers provide these documents right away, but others may wait until they receive offers or even until you’re under contract. If that’s the case, make sure to add this contingency to your offer.
Flyhomes Research will review the package for you and highlight any potential issues. For more information, read our HOA FAQs.
Non-refundable earnest money
If there are any buyer contingencies in place, you shouldn’t release your earnest money deposit to the seller until all contingencies are met.
Some buyers offer their earnest money as non-refundable in order to make their offer more competitive. But that means that, even if the contingencies aren’t met, you will have a hard time getting your deposit back since it became non-refundable. Even if it’s not your fault that the transaction doesn’t close, the seller may be able to retain the funds.
Rent back to seller
Some buyers offer to rent the property back to the seller after the close, which allows the seller time to move and/or purchase another property without having to find temporary housing. This typically requires a security deposit from the seller, to be held in escrow, for the duration of their rent-back period, which works much like any other security deposit in a lease situation. The buyer can also stipulate a penalty if the seller does not move out by the end of the rent back period.
However, rent-back situations may involve loan and insurance issues, as disputes may arise regarding the condition of the property, potential repairs, and whether the issues arose before or after closing. After close of escrow, the buyer is considered the landlord and will likely need to handle any and all repairs, and may be subject to landlord-tenant laws.
Plus, sellers may refuse to vacate or may delay moving out, while most lenders require buyers to move into their primary residence within 60 to 90 days after closing to lock in the agreed-upon mortgage rate. Discuss the possibility of extension and any costs for a move-in date extension with your lender.
Summing it up
Real estate transactions vary depending on the property, type of sale, and market conditions and regulations. There are plenty of contingencies we didn’t cover but these are the ones you’ll likely see most when making an offer on a home as a buyer or reviewing them as a seller. Though they place an extra burden on both parties, they are important to avoid any surprises down the road and make sure everyone is accountable to meet expectations.