What contingencies should I consider when buying or selling a home?

We need to start with what a contingency is in relation to the sale or purchase of a home.

Most simply put, a contingency is something that must happen prior to the purchase agreement becoming a binding contract for the sale or purchase of the house in question. For instance, most home purchases are contingent on the home having an inspection and the inspection report being acceptable to the purchaser (and within the guidelines of local law). If the home inspection report is not acceptable and the seller cannot remedy the situation, then the contract to purchase is now void. Contingencies can serve to provide protection for both the buyer and the seller and are a good thing….as long as we do not add unnecessary complications to an already cumbersome process.

When buying or selling a home there are a wide variety of potential contingencies which may be placed on the purchase. The possibilities for what they can be are limited only to your imagination. For the purposes of this article we will avoid some of the less typical (although some of the absurd things put into purchase agreements would make a more interesting but less useful read) and just discuss the basic contingencies that are in almost every home purchase agreement, and some of the common ones which add complications but are not atypical to normal home sales.

The first group we will discuss are so common that they are itemized and listed in the (Indiana Association of Realtors, Metropolitan Indianapolis Board of Realtors) boilerplate purchase agreement that only needs the specific terms filled in.

These include the buyer being able to acquire suitable financing within a specific timeframe, determination of flood area and assessment of the requirement for flood insurance, the buyers ability to acquire home owners insurance, home inspection and receipt of an acceptable inspection report, title approval, and notification and acceptance of home owners associations. While each of these has the ability to cause a deal to fall through, when proper due diligence and negotiation is applied they tend to be more formalities of the process.
There are some important things to understand about each, so we will go over them individually.

Acquiring suitable home financing within a specific timeframe. Typically this contingency will be for the buyer to acquire a new mortgage within 30-45 days, depending on how the agreement is written. The protection for the home buyer is obvious, as it would be problematic for them to be held to purchase a home that they cannot get financing for. This protects the seller as much as it does the buyer, because no seller wants their home off market for 3 months when the buyer cannot get financed for the home.

The buyer has the option to include an even more protective clause, which limits the amount of the interest rate on the mortgage and the amount of financing fees they will pay to acquire the mortgage. I find this to be an unnecessary complication as I require my buyers to be preapproved prior to making an offer on a home, and because of this, they have a good idea what rate they will be paying from the jump.

Flood area determination and insurance. This is an area that I cannot even believe still has a check box. The language gives the buyer the option as to whether or not they have the right to terminate the agreement based on if the property is determined to be in a flood plain. Given the current prices for flood insurance, anyone who decides to forgo this right is playing a financially dangerous game.

Acquiring a favorable commitment for home insurance. This seems like it is unnecessary, but actually it is an extremely important contingency in the home purchase agreement. If you have a mortgage with less than 20% equity, you probably have to have home owners insurance. If for any reason you cannot buy or afford insurance on the open market, the bank will purchase an outrageously expensive policy (that only protects their interests) for you. Then if you can’t make the payments, you lose the house. So yeah, being able to insure that you can acquire a favorable commitment for insurance is pretty important.

Home Inspection. This contingency is in place to protect the buyer from hidden defects in the property. It is a complex process in itself and could be its own article. In fact, it is its own article- here is the link- The home inspection on the house I am buying came back with a bunch of problems, what do I do now? . The important thing for this article is never waive the inspection, it is the best $500 you will ever spend during your home purchase.

Title Approval. This area of the home purchase agreement dictates what type of title will be conveyed, who will do it and who will pay for it. For our purposes today, the contingency is proof that the seller actually owns and can sell the home and convey a clear title. It seems basic, but it is one of the more important contingencies in the home buying contract.

HOA Approval. This last contingency is a formality. If there is an HOA, it is typically disclosed in the listing. Granted it is still of value, as it gives the buyer another opportunity to review whether or not they actually want to follow through with the purchase. The purchase may also be contingent on the HOA accepting the buyer, although most of those association covenants have been removed in todays world.

The complicated side of home buying and selling contingencies.

Honestly its not the terms of the last two contingencies that make them complicated. they are pretty simple. The complications come in when you actually try to make them work in the real world. These are when the sale or purchase of one home is contingent on either the sale, purchase or closing of another. While buying or selling a home using one of these contingencies can make transitioning from one home to another easier for the party asking for it. They frequently result in homes sitting on market, purchase agreements being declined, and one broken deal after another. There are three major types of these contingencies: purchase and settlement, sale and settlement, and a settlement contingency.

Purchase and Settlement Contingency. This is when a home seller makes his or her home available for sale, contingent on them “finding and purchasing suitable housing”. Sometime what suitable housing is and is not is clearly defined, sometimes its not. I am personally of the mindset that unless my buyer REALLY likes a house, or if there is nothing else on the market that suits my buyer…this is a situation to be avoided.  Even with defined timelines, there are just too many points in this type of contingency which leave my buyer without a home, at significant inconvenience and loss of funds to them.

Sale and Settlement Contingency. This is when a potential buyer for your home has to market and sell their home prior to completing the purchase of a home you are selling. Similar to the above, this type of contingency is rife with risk. The risks on this variety are a little easier to mitigate though as when dealing with someone selling their home, you and your Realtor can do quite a bit of research and get a clear idea on the likelihood of them selling the home in a timely manner. You can also counteroffer for a wide variety of controls to be placed on the contingency. For example, you could give them a first right to refusal and leave the house on the market. Then if you get another offer, you simply give the first buyer the time stipulated in the right to refusal (24-72 hours is the norm) to vacate the contingency and complete the purchase or you cancel that purchase agreement and accept the second offer. Problem solved.

Settlement Contingency. This is the same whether on the buying or selling side. The other party has already reached a purchase agreement on the home that they are either buying or selling, and now they just need to close before they buy or sell a home with you. Usually by the time they have reached this point, its a done deal…but there is the potential for the deal to break down. So if you are accepting this type of contingency it is still important to set clear terms and especially to set a date for the contingency to expire so that you can safely move on if by some chance the other half of the deal falls apart.

Simple contingencies not included in boilerplate purchase agreement.

There are two very common types of contingencies you will see which are not included in the base language of the purchase agreement. One is for an appraisal for a cash buyer and the second is to accept offers contingent on existing purchase agreement not being executed.

Appraisal for Cash Buyer. Much like a home inspection, not many people are going to purchase a home without an appraisal. When a mortgage is involved, the lender makes this a condition of the mortgage. When it is a cash buyer, most if not all will place a contingency in the home purchase agreement for the home to need to appraise at or above the agreed purchase price. If the home is being sold within its market value this should be no problem and I personally view this as unobtrusive for the seller and a must for any cash buyer.

Back up offer. Frequently sellers will hedge their bets when they have a signed purchase agreement and keep the home on the market as “Pending- back up offers only”. In this case they will accept offers even thought they have a purchase agreement and may even accept one, contingent of the first offer not closing per the terms of the original purchase agreement. I view this as taking two bites at the same apple on the sellers part. I also do not encourage home buyers to entertain making these offers unless the market is ridiculously tight or in the event that they just have to at least take a shot at having this particular house. The percentage of homes that do not close when there is a properly brokered deal signed is too low for my buyers to have their time wasted and their hearts crushed….especially when they are betting on someone else’s failure to bring it to fruition.

In conclusion on home sale contingencies…

So you see there are a wide variety of contingencies…and we didn’t even get into the theoretical or ridiculous (Home sale contingent on my dog getting adopted). Some are innocuous and some can almost ensure that a deal will not get done. as always, keeping it as simple as possible is always the best choice…but sometimes its not an option. When its not, make sure you work with an real estate agent who can help you make the deal fit your needs.

Each of these individually represent a reason that you need a professional full time Realtor whether you are selling a house for the fourth time or if you are a first time home buyer. Make sure you are well represented and work with someone who will make sure your home purchase or sale gets from marketed to under contract and to close.

Call Robb at 317-657-8059 or email robb@yourrealtylink.com to set up a buyers or sellers consultation.

If you are thinking about selling your home, or if you would just like to know what your home may bring on the open market; fill out the form below and request a CMA on your home.
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About Robb

A husband, Dad to 5, and Grandpa to 9. US Navy Vet. 18 Year Postal Employee turned full time Realtor. I enjoy a wide variety of things, but you will find that here I mostly write about Indianapolis, government/politics, recent news, and whatever book I am reading or have just finished at the moment.
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