Selling FSBO? Understand Buyer Contingencies

Summary: Contingencies are provisions that either a buyer or a seller can make which guarantees a financially and legally safe way to back out of mutual acceptance. Although not every contingency is a deal-breaker—in fact, many are negotiable—all contingencies must be met before the home is sold.

What Does It Mean When a House is “Contingent?”

Contingencies are specific terms or conditions that can be created by either party. Contingencies are an important piece of the mutual acceptance stage in a real estate transaction, as they must be resolved before the home is sold. If the contingencies are not met (or sometimes if they are not met in a timely manner), the sale can be canceled by either party.

For buyers, contingencies can 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 can ensure that the buyer is in sound financial health and able to handle a mortgage. (Keep in mind that laws governing contingencies are state-specific.)

Where Contingencies Occur in the Home Selling Process

Once the buyer has found the right listing, the buyer’s agent will submit an offer. Formally known as an “Offer to Purchase,” the offer contains the very important “Contract of Purchase and Sale” form. This form details how much the buyer is willing to pay for the house, the type of loan the lender has pre-approved the buyer for, the size of the buyer’s down payment, the “good faith” deposit for escrow, closing cost terms, personal property and desired fixtures terms, and the closing and purchase dates.

For Sale By Owners Tips

Tip 1:  Entering mutual acceptance does not guarantee a deal, as this is not the final stage in the home buying process.

If you agree to the Purchase and Sale agreement, you and the buyer enter the next stage called “mutual acceptance.” In this stage, several events will occur: Earnest money will be deposited by the buyer, you will send over the disclosure packets, the buyer’s agent will perform background research to uncover any liens, and all contingency time periods will begin (e.g., inspections, loan, title, and close of escrow).

Common Contingencies You Will Encounter

Here are a few contingencies that buyers and sellers may need to resolve:

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 arises, the buyer has the power to renegotiate with the seller to either address the problem or credit the purchase price to cover future repairs.

Financing contingencies: These types of contingencies grant the buyer time to shop around for a mortgage. (In “hotter” markets, buyers will approach a seller only after pre-approval.) If the buyer is unable to secure the right loan to satisfy the seller after making a good faith effort to do so, the buyer can reserve the right to back out of the deal with their earnest deposit intact.

For Sale By Owners Tips

Tip 2
: 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.

It’s important to note that lenders will want an appraiser to verify the value of the property, too, so although the buyer may be pre-approved, the bank will want to ensure the home is valued appropriately.

Title contingencies: Also known as a title report, this contingency allows the buyer and lender to ensure the property is free of any liens. Documents will show the house’s history and uncover any “clouds” which may hinder clear title. Title insurance protects both parties.

Home sale contingencies: This type of contingency makes the transaction dependent on the sale of the buyers’ home within the specified period. If the buyers are not able to sell their home within the agreed timeframe (assuming good faith efforts), they are able to back out of the deal and have their earnest deposit returned to them.

Avoiding Headaches with Contingencies

Most contingencies will be handled and resolved by the buyer’s agent, but the few contingencies that will cause the most trouble are also the most common. Issues found from the buyer’s independent inspection can put you in a difficult negotiation position (and often a legal situation if you aren’t careful!) 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 you know about the property.

For Sale By Owners Tips

Tip 3: Always err on the side of caution. You don’t want a leaky water pipe “quirk” to turn into a financial burden for the new buyers if the basement floods!

In theory, the seller truthfully discloses every known remodel (both permitted and unpermitted), defect, and anything that could have an adverse impact on the property’s value. By disclosing this information, the buyer gains transparency for potential liabilities and you the seller are protected from legal recourse. What is disclosed, how the information is disclosed, and how buyers make decisions based on the information disclosed, is dependent on the market.

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