Contingencies in a real estate purchase contract allows the buyer (or seller in the case of seller contingencies) to cancel the contract without breaching the contract. While contractual contingencies can be built in for pretty much anything you can think of, there’s a few common and somewhat standard contingencies for buyers…
- Investigation / inspection contingencies
- Appraisal contingencies
- Financing contingencies
In this article, we’ll dive into each of these three most common contingencies, why you may or may not want to include them in your offer, and other considerations.
Whether you’re looking to buy, sell, or invest in real estate, it’s worth taking the time to properly understand these contingencies so you can create the strongest possible offer and thus increase your chances of getting the deal.
Investigation / Inspection Contingencies
An investigation contingency, often called an inspection contingency, allows buyers to cancel a purchase contract for any discovery related to the condition of the home or any other matter affecting the property.
The term “matters affecting the property” is meant to be vague and covers a wide range of things buyers may care about, including…
- Schools
- Friendliness of neighbors
- Volume of traffic on the street
- Noise from nearby parks or transit
- Shade cast by a nearby redwood tree
- And many more
The inspection contingency is often used to cancel the contract for any reason, especially when buyers get cold feet.
That’s not the core reason the contingency exists, and technically a buyer can’t cancel for any reason. Yet, there’s always something new to discover related to a matter affecting the property, allowing the investigation contingency to essentially be a buyer’s get-out-of-jail-free card.
Because of this, inspection contingencies can be a bit of a sticking point with sellers, especially in competitive markets like the East Bay. If a seller were to receive two identical offers – one with an inspection contingency and one without – the seller would almost definitely choose the offer without the inspection contingency, to increase the chances that the deal will close.
As a buyer, this is something you should keep in mind as you work with your agent to prepare competitive offers.
Appraisal Contingencies
If you’re getting a loan to purchase your home, your lender will most likely order an appraisal of the property.
The appraiser – an independent party from the lender – is meant to discover market value through sales data, making appropriate adjustments for size, location, view, condition, and amenities.
The appraisal contingency is there in case the appraiser’s opinion of value is lower than the price you offered. If this happens, you may cancel, attempt to renegotiate the price, or decide to cover the gap between the appraised value and the purchase price.
If you don’t have an appraisal contingency in place, you are required to make up the difference between appraised price and purchase price with additional cash, find other financing solutions, or potentially cancel the contract – putting your deposit at risk.
Financing Contingency
The financing contingency is in place to make sure that you are able to qualify for a loan at the terms specified in the contract. If you discover that you can’t qualify for a loan while this contingency is in place, you can cancel the contract.
To mitigate this risk, many lenders in our area are thoroughly vetting buyers/borrowers prior to making offers. This means that they take the process one step further than “pre-approval” – digging deeper into your financials so you and your creditworthiness are fully underwritten and the lender gets as accurate a picture as possible of your finances.
Once the lender fully assesses your finances and you are fully underwritten, it may then be possible/reasonable to submit offers with no financing contingency with very low risk to you.
Speak with your lender about the risks with your specific situation.
Should You Waive Contingencies?
Right now in Oakland, Berkeley, and much of the East Bay, contingencies are often waived to better compete against other buyers. While this may be necessary to have your offer accepted, it may often be against the advice of your real estate agent.
Canceling a contract without the protection of an applicable contingency can put your earnest money deposit at risk, which can amount to tens of thousands of dollars in our market.
On the other hand, writing an offer that includes contingencies may make your offer less competitive in the eyes of the seller, especially in a multiple-offer situation.
Speak with your agent about the risks of waiving contingencies prior to submitting offers.
Which Contingencies Do You Need?
Now that you’re familiar with the three most common types of contingencies, as well as the pros and cons of including contingencies in your offer, which contingencies should you have in place?
The answer to that depends on the property, the competition, and your situation. Typically, buyers want to have as many contingencies in place for as long as possible for their protection, while sellers want as few contingencies as possible for as short a period of time as possible.
Talk with your agent about finding a happy middle ground that gives you the protections you need while staying competitive against other offers.
Are You Looking To Buy, Sell, Or Invest?
If you’re in the process of buying, selling, or investing in real estate in Oakland, the East Bay, or beyond, we’re here to help. Our team of experts is standing by, ready to help you navigate the competitive Bay Area real estate landscape.
We have experience with multiple types of contingencies, competitive negotiations, multiple-offer situations, and much more – and we’d love the opportunity to help you with your real estate goals too. To get started, click here.
