Sellers Advice
June 21, 2019 | Robin Kencel

The Value of Contingency Clauses in Purchasing a Residential Property

The Value of Contingency Clauses in Purchasing a Residential Property

Buying a home for the first time can be overwhelming, to say the least, especially if you have lived in a place where all you needed to do was make a phone call to have a problem solved. If you are a worrier, you can start worrying even before the property is yours– what if the mortgage lender doesn’t approve our application? What if the building inspector didn’t identify a potential problem? What if, what if, what if– it can make you crazy.

Besides the obvious– that a skilled Realtor should be able to guide you through the process and problems that might emerge, the majority of the greatest risk factors can all be tamed by a single concept—one that is built into almost every formal offer to buy. The concept is the “buying contingency”—a built-in fail-safe every home-buying veteran knows well. There are usually multiple contingencies built into every offer to buy. Each one addresses a what-if circumstance that allows the buyer to either opt-out or alter the offer. Here are five areas where contingency clauses serve to alleviate buyer anxiety:

1. Financing. If a buyer isn’t planning on paying with cash, a home loan will have to be arranged. If it cannot be arranged in a timely manner, a financing contingency may relieve the buyer of being penalized for the failure to close.

2. Appraisal. This is usually part of the financing situation. If the lender’s appraiser arrives at a value lower than what would warrant a sufficient home loan, this contingency may allow for a renegotiation of the price and/or a cancellation of the deal.

3. Inspection. If the buyer’s professional inspector’s report discloses interior or exterior faults that were previously unknown, depending on the extent of the problems, this contingency addresses what happens next. If negotiations fail to yield a satisfactory solution, the buyer can back out of the sale.

4. Title. This contingency addresses possible “clouds” or undisclosed liens or judgments against the property.

5. Sale of Current Home. First-timers don’t need to worry about this one—but for existing homeowners, this allows a buyer sufficient time to sell their own home. If no buyer surfaces, it allows the buyer to avoid having to pay for two homes at once. The downside is that the seller may choose a competing offer (even one for a lower sale price) if it doesn’t contain this contingency.

Multiple contingencies are effective ways to relieve buyers of risks that would otherwise prevent a free-flowing market.

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