What are contingencies, and do you need them?

Can you plan to buy a home without any risks at all? With contingencies, that answer could be yes.

Contingencies refer to special provisions put into a real estate contract to account for any circumstances that would deter a buyer from moving forward with a sale. Contingencies also usually mean a buyer won't lose their earnest money—the one percent to three percent of the home sale price that a buyer puts down to show good faith and move forward with the homebuying process. One to three percent sounds small, but remember, that usually translates to a few thousand dollars—not so earnest!

Many contingencies are commonplace in real estate contracts, so it's not so much a matter of including them, but a matter of waiving them. Why would you want to waive any contingencies? Well, it can help show you're even more serious about a property, and it can also help you stand out amid a sea of other offers. Contingencies almost always benefit the buyer rather than the seller, so buyers willing to waive certain contingencies are attractive to sellers who want to make a transaction quickly.

Here are five common types of contingencies and the circumstances when a buyer may be able to waive them. Remember, contingency laws vary state by state, and your real estate agent should be able to guide you more thoroughly on whether or not you need contingencies like the ones listed below.

5 Common Types of Contingencies

Inspection Contingency

What is it?

You've likely heard of an inspection contingency, also called "due diligence." This common contingency means buyers can (and should) get a home they've put an offer on inspected within the due diligence period, usually a span of about one to two weeks, although sometimes it can be less in more competitive markets. A credentialed inspector, often recommended and arranged by your real estate agent, will check out absolutely every last nook and cranny of the home, evaluating electrical mechanisms, plumbing, the foundation and structural elements, heating and cooling, windows, and more. Note: This inspection usually doesn’t include a thorough roof inspection (they'll typically eyeball it only due to safety concerns), so a buyer may need to get a separate roof inspection based on a home inspector's preliminary thoughts on a roof's condition. Shortly after the inspection is completed—and still within the due diligence period—a buyer will receive a detailed report on the home and can decide whether they want to move forward with the sale or, if the home is in poor condition, walk away with their earnest money. A buyer can also renegotiate the terms of the transaction based on the inspection results.

Do I need it?

You'll almost always want a professional to thoroughly inspect a property before you're stuck with it for 30 years. But there may be a few select instances when you can work around an inspection contingency, particularly if you're in an uber-competitive market and want to stand out to sellers. One possibility is if you're purchasing a new build. That means many of the things an inspector would be checking—foundation, plumbing, electric, roof, etc.—would be brand new and have met strict federal, state, and even local regulations. If you’re considering a historic home or any sort of older home, you're absolutely going to want an inspection. And frankly, when you're purchasing a home—which is probably the biggest purchase you'll ever make—you're still probably going to want a professional inspection even if it's brand-new. (Investopedia agrees.)

A better option than waiving is something called a pre-inspection. This means you'd bring in a professional home inspector before making an offer on the house—the buyer always pays for the inspection anyway, so you'd be responsible for the cost whether you did an inspection before or after making an offer. Following a pre-inspection, you'd still get the same detailed report, but the seller wouldn't be faced with you potentially backing out once the process has started. Instead, you just wouldn't make an offer. Now, this could add up for the buyer if he or she does several pre-inspections before putting in an offer, but it does help put a seller's mind at ease and help the buyers stand out. Not into a pre-inspection? There's one other potential option: You can offer to shorten the due diligence period down to a week or even five days, allowing you to get an inspection done after you've put in an offer, and allowing the seller to have invested less time if you end up backing out.

Appraisal Contingency

What is it?

An appraisal contingency helps prevent buyers from paying too much for a property. This contingency outlines that a property must be valued at the sale price or higher by a professional appraiser. A lender needs to know the actual fair market value of a property to know how much to lend the buyer.

Do I need it?

You're probably going to want it. Unless you're absolutely dead set on a particular home and/or down payment and budget are of no concern, an appraisal contingency is an important way to protect buyers. Let's think about a potential example. Say a seller is asking $400,000 for a home, and you put in an offer at asking price. You plan to put 10 percent down, meaning you'll have a mortgage of $360,000. Next, a professional appraiser (sent by the lender) comes out to take a look, and finds the real value of the home—based on its condition and neighborhood comps—is only $350,000. The bank won't provide a single dollar more than what the house is worth, leaving you $10,000 short if you don't have an appraisal contingency. An appraisal contingency means you can go back to the seller with the appraised value and ask them to lower the price. And if they won't (they’re not legally obligated to), you can walk away.

Financing Contingency

What is it?

A financing contingency, also known as a loan or mortgage contingency, means that moving forward with a sale is dependent on you, the buyer, receiving financing.

Do I need it?

Not necessarily. If you're not using a lender and/or are paying in cash, you can waive this contingency since you're financing things yourself. Moreover, since sellers are more likely to accept offers with the fewest contingencies, you can also waive this even if you are using a lender. How? One word: pre-approval. By taking time to get pre-approved before starting a house hunt, you can show a seller you’re a serious contender and that a lender has already agreed to cover you up to a certain dollar amount.

In some cases, a financial contingency is interrelated to an appraisal contingency in that it can help protect the buyer if a seller is asking for more than the lender will cover. It also can provide peace of mind in the unlikely event of your loan falling through at the last minute.

Home Sale Contingency

What is it?

A home sale contingency is a common real estate caveat designed to help home buyers—specifically buyers who already own a home. A home sale contingency means that the transaction between buyer and seller is dependent on the sale of the buyer's home. Usually, the sale of the buyer's home is required to occur by a certain date or the contract falls through. After all, a seller can't wait forever. According to Investopedia, there are two types of home sale contingencies: sale and settlement, or settlement only. A sale and settlement home sale contingency means a buyer is able to sell and close on their current home before purchasing the next one. A settlement-only contingency means a buyer may already have an offer in hand on their current home, but they’re waiting until after the closing to protect themselves in case the sale falls through for any reason.

Do I need it?

If you're not a first-time homebuyer—i.e. you already own a home—you very well may need a home sale contingency, particularly if you're purchasing a more expensive home and will need the money from the sale of your current home to help fund the purchase. However, a home sale contingency is risky for sellers (if your home doesn't sell, the seller won't make a sale either), and they may not be willing to agree to it. Most sellers will require that a would-be buyer's current home is already on the market and listed at a correct, competitive price before agreeing to a home sale contingency. If a buyer has money to spare, he or she may feel comfortable waiving the home sale contingency. Otherwise, they'll probably want to include it. First-time homebuyers do not need a home sale contingency.

Lead-Based Paint Contingency

What is it?

Did you know it’s federal law that buyers have to inspect for lead-based paint on any homes built before 1978? I didn’t. Which is why I didn’t have a lead-based paint contingency. I was on the hook to have all my exterior (not even interior) windows painted before I was able to close on my home, costing me thousands of dollars for a quick, shoddy paint job that had to be completed in a matter of days. A lead-based paint contingency isn’t a make-or-break contingency that would prevent someone from purchasing a home, but it’s something buyers should know about so they can have sellers help take care of repair costs if necessary.

Do I need it?

If you’re looking at a home built after 1978, no. If you’re considering an older home, it may be worth adding a lead-based paint contingency.

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