All About Home Contingencies: When to Use ’em, when to ditch ’em

I wish I could go back in time and save all you folks who waved your contingencies during the Pandemic housing craze. Alas, that would be impossible.

If you waved your inspection and ended up with a golden turd; I’m sorry.

Since it’s too late to help you, I hope this article sheds light for the buyers out there now and in the future.

 Please, make sure a licensed professional expands on and clarifies my opinions below. I am not a licensed professional qualified to give you personal advice, but I’ll share the knowledge I’ve learned from my own experience.

The basic general advice is to always keep the standard contingencies in your contract. The moment that you’ve realized your home-to-be may actually be a craphole, you want an out. Contingencies are there to protect you.

There are times when they can work against you though.

For example, the competition will be stronger when it’s a hot market. There is also more competition if a house is highly desirable, if the price is very low, or if it’s located in a highly desirable location. In highly competitive situations, the less contingencies in your offer, the more attractive your offer will be to the seller.

Okay, let’s go over the three most common contingencies first.

Contingency #1–  contingent on the satisfaction of your home inspection results. This way, if the home inspection uncovers unsavory secrets, you can say, “nah, let’s cancel this mess”, and move on with your search.

After your inspection, there’s usually three ways of moving forward. In the first option, you explain your dissatisfaction with the home inspection and you cancel the contract. You should get your earnest money back, no harm no foul; everyone moves on.

Or perhaps instead, you’d like to reduce your offer now. You can do that but you’re back to negotiating and the seller can always say no and walk away. Generally, I do not think this is likely unless the market is hot, but you never know. If the seller has backup offers, they don’t need to negotiate. There could be many variables involved so you want to consider them all and make the move that works best for your situation.

Finally, in the third option, you can ask the seller to repair the items that were an issue. I have never personally used the third option. For me, it has always been more beneficial to either reduce my offer or walk away but that is because I have access to a team of carpenters, and I can handle minor repairs on my own.

When I hear about buyers asking for sellers to do 20 dumb things like replace lightbulbs, trim the bushes, or fix a barely wobbly step, it’s a big turn off. If you’ve ever moved, you know how hard it is. I don’t want to make people’s lives more difficult. I’d rather ask for a slight discount. It saves money and its easier for them. Remember how you would feel if the tables were turned. Because most likely, someday you’re going to sell too (if you haven’t already). All moving sucks but moving out is harder than moving in.

When could you waive this contingency?

If the market is highly competitive, your offer is stronger without it. But this comes with massive risk. Only consider leaving it out if you’re a handy/carpentry aficionado, if you’re gutting the home, or if you’re rich and don’t give a fuck about losing a bunch of money.

Additionally, if you’re in a fire-hot market where everyone has lost their freaking mind, bring an inspector or trusted contractor with you to your home viewings (if possible). That way you can waive the inspection contingency with less risk.

Now, you may be tempted to think “hey- I’m buying it and gutting it so it doesn’t matter, let’s waive it”, the thing is- you’re possibly leaving money on the table. If something came up in the inspection, you’d be losing an opportunity to negotiate a lower price which would have been a boon for you. The risk with negotiating after the inspection is still something to carefully consider if you do choose to renegotiate. Just a thought.

Contingency #2- contingent on property appraising at or above purchase price. If you are having the home financed, the bank will require an appraiser to come and tell them what they think your house is worth.

If the appraiser’s report comes back lower than what your offer was, the bank will not finance the original amount. They’d most likely tell you to either make up the price difference with your own money, adjust the sale price, or scrap the whole thing all together. This contingency gives you the right to cross those bridges if necessary and (in the worst-case,) it lets you back out of the deal.

When could you waive this contingency?

If you’re a cash buyer, if you know without a doubt that you’re getting a fantastic below-market deal, if you’re super-duper crazy experienced and trust your market knowledge, or if you have the cash to make up for the difference in appraisal and purchase price, then you could skip this one.

And just to be very clear, an appraised value is not the same as an assessed value. Lots of people confuse these two things. An appraisal is done by a professional appraiser. Appraisals are most often conducted for lending purposes or by owners who’d like an estimated value for their property. An assessed value is done by the county assessor. The assessed value is an estimate of market value used strictly for tax purposes. Read my article about assessor sites and assessed value here.

Contingency #3contingent on final approval of buyer’s loan. Even if you have been pre-approved and the bank has said “Yes! You are the best client ever and we will definitely give you money for a house!”, things can go wrong. This contingency protects you if the bank decides, last minute, that they aren’t going to give you the loan.

For example, maybe you went on a credit-card fueled shopping spree for a bunch of new furniture before your final loan approval. Or maybe you bought a new car. Do not do this! Never increase your debt if you’re in limbo on buying a home. If you go out and buy a car or a bunch of other stuff, if might affect your debt-to-income ratio. The bank could then decide, “Never mind! You can’t afford this house anymore”. Or maybe you lose your job. There are all sorts of things that could happen right before you close.

When could you waive this contingency?

Basically, only when you are rolling in so much cash that you can cover the full purchase price plus closing costs all on your own. Or if you have family cash reserves, or other financial backup. If you need lender financing, it’s best to keep this contingency for your protection.

Okay, now let’s look at a couple slightly less common contingencies.

Another common contingency, but not common in my area, is a title contingency. This states that the home’s title must be free and clear of any liens/encumbrances. Where I am, in the Midwest, this is required and stated in the body of the contract, rather than written in as a contingency. I hear that many buyers are required to purchase title insurance as well. You can read my opinions about title insurance here.

What about a home sale contingency? Sometimes a buyer may want to add contingent upon the sale of buyer’s current home. You can add this clause, but some real estate agents will tell you that it is practically pointless in a hot market. Sellers may agree but with the condition that if they receive another offer, you have to drop the contingency or they will accept the new offer instead. In a buyer’s market, this contingency might work fine. It just depends. If you cannot buy a home without selling your current home, there are other options such as bridge loans, HELOCs, etc.

There are many other types of contingencies which I haven’t discussed but they’re generally used by more experienced buyers. There could be escalation clauses or there could be contingencies on city approvals, utility installation costs, etc.

As a final observation, I’d like to share my experience on contingencies in “as-is” homes. Some people believe the “as-is” designation means they can’t have an inspection or financing. Where I live, you can still have the standard contingencies in an “as-is” sale. Instead, the “as-is” designates that the seller did not live in the home or cannot answer questions about the home; therefore, there is no property disclosure. This is common if the home is in foreclosure, has become part of an estate sale, or if the home was a rental for a long period of time. Additionally, “as-is” designates that the seller will not remedy any issues that may be found in the inspection. You can still walk away from the deal or ask for a price decrease though. “As-is” may have different geographic interpretations, or may be presented differently depending on the sellers’ needs.

Remember! Always contact your own licensed professional for any advice regarding the purchase or sale of a home.

Okay, what do you think?

Do you have any crazy stories to share about your buying or selling experience and the contingencies you did or did not use?

I want to hear all about it!

HouseRat Zero

Leave a Comment

Your email address will not be published. Required fields are marked *