A contingency is a clause in a contract offer that allows a home buyer to void their offer if the terms of the contingency are not met satisfactorily.
In other words, a contingency offers a layer of protection for the buyer.
This article focuses on real estate in the Washington D.C. & Baltimore areas
National Association of Realtors Chief economist Lawrence Yun says housing inventory will remain tight through 2023. This means limited supply with higher demand. Many home buyers, are frustrated by the competition for housing. Listing brokerages and sellers often ask for the highest & best offer and offers with the least amount of contingencies.
Before you waive a contingency, it's critical you understand what contingencies are and the protection they offer.
The real estate contract is the most important document in the home buying process. It outlines the conditions of the transaction. The buyer and seller may negotiate the terms of the offer. Once the buyers and sellers agree to the terms, they sign and initial the contract. At this point, the contract is ratified meaning the parties have agreed to the terms of the contract.
The clock starts ticking on the contingency deadlines
Day one is the first day after contract acceptance and agreement.
Each contingency will include a number of days and begin on day one.
For example, the contract could include a 3-day home inspection contingency. This means the buyer has 3 days to complete the home inspection and provide the seller with the home inspection report and inspection addendum.
The seller and listing agent review the report and addendum and respond within the time frame per the terms of the contract. If the contract includes the right to negotiate and the right to cancel, the buyer and seller often negotiate credits or repairs.
Once both sides have come to an agreement, the parties initial the inspection addendum satisfying this contingency. If the seller and buyer do not come to an agreement, the buyer has the right to terminate the contract, if this option is included in the contract.
Each contingency has a timeframe written in the contract. Depending on the buyers needs and the type of property, the contingencies may include;
financing, appraisal, mold, radon, well potability, septic system evaluation, pool, termite and others.
The financing contingency means the buyer has to obtain a mortgage commitment from a lender for a loan for the total purchase price. The contract will include the contingency deadline. In the Washington D.C. area, lenders can meet this contingency deadline within 7-10 days.
An appraisal contingency gives the buyer the right to terminate the contract or negotiate the sales price should the property not appraise for the offer price.
For example, buyers and sellers have agreed to a sales price of $950,000. The offer includes a contingency for an appraisal. An independent appraiser, sent by the mortgage lender, goes to the property and conducts an evaluation.
The appraiser then submits the appraisal to the lender and home buyer. If the appraiser's appraisal comes in at $925.000, the buyer typically negotiates to reduce the sales price. If the buyer and seller cannot agree on a sales price, the buyer has the right to terminate the contract.
The process of negotiation is commonly referred to as the contingency period. As previously stated, each part of the contract including a contingency is assigned a deadline.
There are often multiple contingency deadlines, so you’ll need an attentive and experienced buyer’s agent to keep track of details, negotiations and deadlines.
At HomeBuyer Brokerage, our goal is to educate our buyer clients so they can make informed decisions. We don’t expect you to keep track of details and deadlines on your own, we advocate for you through the entire process.
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