Real Estate Contingencies Explained
The buying & selling of real estate can be very stressful to say the least. I wanted to write this blog so that those who decide to read it and find themselves trying to navigate through a real estate transaction themselves, it may shed a little light on how these contingencies can help keep your stress levels at low levels.
So What is a Contingency?
The dictionary says its "a possible but not very likely future event or condition.” In our real estate contracts, we have built in contingencies that protect both the buyer and the seller from events that may or may not happen. The real estate contracts spell out the specific time periods for each individual contingency and so as long as the buyer stays within the contingency time periods, they are protected.
The most common contingencies are the appraisal contingency, financing contingency, HOA contingency & the sale of another home contingency. A real estate contract can be made contingent on many things.
If the owner of a home has a large IRS tax lien against it, a potential buyer may make an offer contingent on the IRS lien being taken care of. If the owner of the home does not pay the IRS lien by a specific time period, the buyer can walk away from the deal with no penalty. The buyer could also agree to extend the contingency period and continue on with the transaction.
The Appraisal Contingency
The appraisal contingency protects the buyer from over paying for a home. When an offer is made there is a specific time period agreed upon by the buyer and seller for the duration of the appraisal and financing contingency. The average days for an appraisal contingency is 20 days which means the appraisal must be ordered by the lender and the value must be returned within that 20 days. The appraisal is required by the bank on a financed deal to make sure that the buyer and bank are not over paying for the property. The protection happens when a buyer makes an offer for $350,000.00 and the appraisal comes back at $320,000.00; the bank will only lend on appraised value so in this example the value is $30k low. At this point one of four things can happen: #1 The seller can reduce the price to the $320k appraised value, #2 The buyer can pay the difference out of pocket, #3 The buyer and seller can agree to meet in the middle or some other sort of deal to make up the $30k difference, or #4 If no agreement can be made the buyer can cancel and move on with no penalty. The bummer about this is the cost of the appraisal is not refundable so being out $400-500 is no fun.
This is where having an experienced agent comes in handy. We know the value of these homes as we have the same access to closed past transactions as the appraisers do (we call these comps). A solid agent won’t allow you to get into a bad situation like this and on the other side of the coin an experienced listing agent will recognize that the offer made was too high and probably would not appraise. In these cases we would ask the buyer to waive their appraisal contingency up front and if the buyer agrees, they agree up front to pay the difference on a low appraisal. Right now in Las Vegas we are seeing a lot of this happening as values skyrocket higher & higher because of low inventory and huge demand.
The Financing Contingency
The financing contingency has to do with the buyers obtaining their mortgage financing. The average time period for a financing contingency is 25 days. This serves as a protection for the seller and gives the buyer a time line to obtain their full loan approval. If the buyer does not obtain their loan approval within this time period, the buyer would need to either cancel the contract to protect their Earnest Money Deposit, OR ask for an extension. If the buyer can prove to the seller that they have everything in place and they need just a few more days they may get an extension. In the old days, there was no specific number of days set for this contingency so as you can imagine this left the seller hanging out in the wind.
The HOA Contingency
The HOA contingency says that the seller must order and pay for the HOA resale package and must deliver this to the buyer as soon as possible. Once delivered to the buyer, the buyer has 5 days to review the HOA docs and CC&R's and can cancel with no penalty. This contingency was put in place to protect the buyer and give them time to make an informed decision.
Sale of Another Home Contingency
If you want to sell your home and buy a new one but cannot buy the new one without selling the home you’re in, you will make an offer with a contingency on the sale of your existing home. So the seller of the home you’re making the offer on knows that his home won’t close until yours closes first. If your home never closes then you can cancel the sale of the new home with no penalty. The seller can put time lines for these types of contingencies.
I hope this helps you understand what some of these terms and contingencies mean.... Thank you for reading...