Summary: Contingencies are specific terms or conditions that can be created by either party. They are an important piece of a real estate transaction as they guarantee a safe exit out of the transaction should any contingency not be resolved. Handling contingencies will depend on the type of provision, the associated costs, and coordination between stakeholders.
Selling your home FSBO can be both a challenging and rewarding process. Contingencies play an important role for both buyers and sellers. They guarantee a safe exit out of mutual acceptance should any contingency not be resolved, and they also allow the buyer to negotiate a fair price for your home.
Quick Summary: What Are Contingencies?
Once the buyer has found the right listing, the buyer’s agent will submit an offer (known as a Purchase and Sale agreement) which details how much the buyer is willing to pay for the house, the type of loan the lender has pre-approved the buyer to use, the size of the buyer’s down payment, the ‘good faith’ deposit for escrow, instructions for handling fixtures, important dates, and the buyer’s contingencies.
If you agree to the Purchase and Sale agreement, you and the buyer enter the next stage called “mutual acceptance.” Contingencies are an important piece of mutual acceptance stage in a real estate transaction as they must be resolved before the home is sold. If the contingencies are not met, the sale can be canceled by either party.
To help expedite the transaction, prepare a disclosure packet ahead of time to give to the buyer’s agent prior to their offer to purchase.
What Does It Mean if a House is a Contingent
For buyers, contingencies ensure a safe way to cancel an offer with a promise that the earnest money initially deposited at mutual acceptance will be returned. For sellers, contingencies ensure can ensure that the buyer is in sound financial health and is able to handle a mortgage. As a home seller, keep in mind that laws governing contingencies are state-specific, so it’s important to consult with an attorney.
Common Contingencies and Resolutions
Most contingencies will be handled and resolved by the buyer’s agent in conjunction with their stakeholders, but the few contingencies that will cause the most trouble are also the most common. Below is a list of the most common contingencies you may encounter with actionable ways to address them as a seller.
Inspection contingencies. These types of contingencies allow buyers to inspect the property in good faith by choosing their own 3rd party inspector. If a problem is found, the buyer has the power to renegotiate with you to address the problem. Issues discovered in the buyer’s independent inspection can put you in a difficult negotiation position if you haven’t prepared a disclosure packet.
The solution. In order to ensure there are no surprises for the buyer, it’s important you document as much as you can in your disclosure packet. The disclosure packet contains everything the buyer should know about the property.
Financing contingencies. These types of contingencies allow the buyer to shop around for a mortgage. If the buyer is unable to secure the right loan to satisfy your side of the deal after making a good faith effort, this contingency allows the buyer the right to back out of the deal with their earnest deposit intact.
The solution. As a seller, you will wait for the buyer to return with a loan commitment letter from the lender as the buyer will have a predetermined amount of time to resolve this contingency.
Financial contingencies are market-specific and state-specific: In hotter markets, buyers will include their mortgage terms in the offer.
Appraisal contingencies. Lenders will want an appraiser to verify the value of the property, so even if the buyer is already pre-approved for a loan, the bank will want to ensure the home is valued appropriately. An appraiser is an independent third party real estate expert who will examine your home, document its condition, and produce a written report for the lender.
The solution. As a seller, there is no need to hire an appraiser. The buyer is unlikely to trust an appraiser who isn’t their own, and the buyer is required by the lender to hire their own.
Title contingencies. Also known as a title report, these contingencies allow the lender to ensure your home is free of any liens. During the title search, documents will show your house’s ownership history to uncover any “clouds” which may complicate loan payment and title and deed transfer.
The solution. As a seller, you can be proactive by performing your own title search and addressing any liens. In addition, consider buying title insurance. Even though the buyer’s agent will perform their own title search regardless, removing liens ahead of time will make the title and deed transfer quick and easy.
Home sale contingencies. Although rare, these contingencies ensure you have the right to transfer the title and deed to the buyer.
The solution. As a seller, it’s your duty to ensure you have the right to sell the house in question. Your ability to sell the home will be answered during the title search and by contacting the settlor of the trust (if applicable).
No single inspection can uncover every problem, and not all problems warrant repair by you, the seller. You can defer the costs of some repairs to the buyer by renegotiating the price.
In order to ensure there are no surprises for the buyer, it’s important you document as much as you can in your disclosure packet. Your disclosure packet should contain everything you know about the property including every remodel (both permitted and unpermitted), defect, and anything that could have an adverse impact on your home’s value. By disclosing this information, the buyer gains transparency for potential liabilities and you the seller are protected from legal recourse.
Remember that contingencies are an important piece of a real estate transaction. They guarantee a safe exit out of mutual acceptance should any contingency not be resolved. Handling contingencies will depend on the type of provision, the associated costs, and coordination between stakeholders, but you can take preliminary steps by creating a disclosure packet and by performing your own title search to clear any liens.
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