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As ubiquitous as they are in real estate, contingencies are essentially “Get Out of Jail Free” cards for buyers cloaked in legalese. That’s not to say that a buyer who includes contingencies in their offer is unreasonable or out of line. But there’s a reason contingencies were once referred to as “weasel clauses” back in the 80s: To this day, they provide an escape hatch, which can leave you (the homeowner) in the lurch with a house you thought was good and sold.
As a seller, you’re likely wondering how to remove contingencies from your purchase agreement altogether or at least keep them in check. With this guide, find out how to protect your interests (whether you’re dealing with standard or unusual contingencies). We’ll cover how to:
Contingencies in real estate are incredibly common — 76% of settlement contracts in May 2020 had one. Although some buyers will have crazy requests like the house be cleared as “ghost-free” — here are the contingencies most likely to crop up in a standard home sale contract.
Contingency 1: Home inspection
Often called the “due diligence” contingency, this stipulation requires a professional home inspector to evaluate the property onsite to check for and document any potential health, safety, or mechanical issues with the property. Buyers usually have 7-10 days to have the property inspected, and after that the contingency expires.
During the inspection phase, a buyer can walk for nearly any reason, says Brett Jennings, a top-selling real estate agent in San Jose, California. “The property inspection contingency is so broad, they could say the bus stop is further away than we thought so we’re cancelling the contract,” Jennings warns. Issues that come to light during inspection can extend the negotiation period, and the buyer can even walk away if they’re not satisfied.
How do you remove it?
One way to gain leverage for eliminating the home inspection contingency is to opt for a pre-listing inspection. A pre-listing inspection takes place before the home hits the market. It will highlight any issues in the home before a buyer even puts in an offer, giving you the ability to negotiate and price the home appropriately.
With a pre-listing inspection in hand, your buyer is more likely to waive the home inspection contingency, especially in a competitive seller’s market. For this to be effective, be sure to provide buyers with the full inspection report upfront, noting which repairs you made to the property and which issues you’ve left (and factored into the price).
To be clear, a pre-listing inspection can help encourage buyers to waive the inspection, and give them peace of mind over your home’s condition. However, it’s no guarantee that they won’t still request a separate inspection with a contingency that hinges on the results. Buyers may wonder if they can trust that an inspection paid for by the seller — so, expect some pushback on the potential conflict of interest.
Contingency 2: Home appraisal
The appraisal contingency gives the buyer the right to back out of the sale if the home appraises for less than the agreed-upon value. Traditionally, the appraisal takes place after the inspection, and must be completed in the 21 day period after signing the offer. The contingency states that the appraisal must meet or exceed the sales price; the seller will only have an issue if the property appraises under the contract price.
If the appraisal does come back under contract value, then the buyer and seller will have to negotiate to see who will cover the difference in the loan offered by the bank. If the two parties can’t reach an agreement, the buyer has the right to walk away from the sale, earnest money in hand.
How do you remove it?
You can try to avoid dealing with an appraisal contingency with the following strategies:
1. Sell to a cash buyer
If you don’t want to worry about the appraisal, your best bet is to find a cash buyer. Because cash buyers aren’t seeking a loan from the bank, they aren’t required to get an appraisal done to obtain the funds. HomeLight’s Simple Sale platform can give you an idea of what an instant, pre-approved cash buyer would pay for your home versus what an experienced agent thinks you could get on the open market. Otherwise, if you receive multiple offers and one of them promises to be all cash, you can select it over the other offers (just make sure you check for proof of funds first).
2. Negotiate it out
In a seller’s market, buyers might waive the appraisal contingency to make their offer more compelling. That means, no matter the appraised value of the home, the buyer cannot back out with their earnest money. If the home appraises under contract, the buyer will be on the hook to cover the difference with their own funds (again, you’ll want to ask for proof).
Contingency 3: Home financing
A financing contingency states that the buyer must secure financing (via a mortgage) to buy the house. If they can’t, they can back out of the contract at no cost. The financing works in conjunction with appraisal (lenders will need to ensure they aren’t financing more than the property’s fair market value). The mortgage contingency can last as long as 30-60 days. Because it hinges on other elements of the home buying process, and underwriting takes so long, this is often the last contingency to be met and also one of the riskiest for sellers.
How do you remove it?
In a seller’s market, it’s not uncommon for the buyers to remove this contingency to create a more compelling offer. “What we’re seeing in more markets is buyers getting fully pre-approved before putting in their offer,” says Jennings. “They’re coming in and waving their financing contingency, claiming they’re all but certain they can get the loan.”
Similar to the appraisal contingency, another option is to sell your house to a cash buyer — whether you choose to sell off market to an investor, or try to field cash offers from buyers on the open market with your agent.
Contingency 4: Home sale contingency
Many buyers are unable to purchase their next residence until they sell the one they’re living in — either because taking on two mortgages would max out their debt-to-income ratio limits and then some, or because they need to liquidate the equity from their existing property for a down payment.
Because they have no other choice, some buyers will make offers contingent on selling their current home (by the way, our Trade-In program solves for this conundrum!).
But beware: the home sale contingency is one of the riskiest for sellers to have in their contract. “There are so many variables that can prevent or slow a sale down from the buyer,” Jennings says. “The buyer might not get any offers because they didn’t price it right.”
How do you remove it?
If a buyer makes an offer with a home sale contingency, you can counter them and ask them to remove it. This would likely require them to find an alternative solution, such as a bridge loan, to move forward. You could also allow for the contingency, but only once the buyer has a viable offer secured and closing date set for their existing residence. If a buyer at least has an offer in place, there’s a stronger likelihood that they’ll be able to close on your house by the deadline.
KEEP IN MIND: It’s worth noting that even if the above contingencies are removed, the buyer can still request a home inspection and appraisal, explains Jennings. Waving the contingencies means that a buyer can’t walk away scot-free from the deal after an inspection or appraisal, but it doesn’t eliminate their right to have one.
Beyond the standard contingencies, you’d be surprised what kind of requests buyers include in their offers. Look closely at an offer, and you might notice one of the below:
Just because buyers and sellers can ask to include whatever contingencies they like in their offer and counteroffer, doesn’t mean it’ll make it into the final agreement. Both parties have to accept the contingency, and if they can’t agree, they’re free to walk away.
When it comes to unusual contingencies, a seller can request their removal, but depending on the market in their area, they run the risk of losing out on the offer. If a contingency-laden offer comes rolling in, you’ll want to consult with your agent to assess its risks and benefits.
The best way to remove contingencies from your contract is keeping them out to begin with. Keep these strategies in mind:
If you have to include contingencies, set clear deadlines and expectations
Even if you can’t negotiate contingencies out of your contract, there are some strategies that make sure buyers don’t dilly-dally on their way to closing. Include the following to ensure a timely and stress-free closing:
Not all buyers will agree to a contingency-free sale, but including provisions to protect you as the seller in the contract can help avoid missed deadlines or an extended closing.
Get a pre-listing inspection to avoid a deal killer
A pre-listing inspection can be a blessing, and a curse. It could uncover costly issues with your home, but it puts the knowledge of the issues squarely in the hands of the buyer. On the plus side, a pre-inspection allows you to make repairs before putting the home on the market, offer credits, or price your home competitively to sell with confidence.
A pre-listing inspection also makes it less likely that a buyer will walk away post-inspection. They already have a good idea of the home’s condition, and depending on the market, they might even waive the inspection altogether for a more appealing offer.
Anticipate appraisal snags with a laser focused pricing strategy
If you can’t waive the appraisal contingency, you can avoid complicating things with a carefully crafted pricing strategy. Use your agent’s CMA and online pricing tools to come up with a number that considers market trends and factors in any updates or improvements you’ve made. Accurate pricing will help avoid the pitfall of a low appraisal.
Know the norms for your region
Different states and regions have different guidelines when it comes to removing contingencies and honoring them in contracts. In California, buyers must complete contingency removal forms for the contract to move forward and remain binding. In all other states, you’ll want to keep an eye on deadlines, as well as the fine print of offers. In some instances when the contingency date passes with no action, it’s considered to be removed. In other states, missing the date will only lead to delays, or can be grounds to cancel the contract altogether.
Contingencies are common in a real estate contract, but with the right market and sales strategy, a seller can ask for certain contingencies to be waived, keep contingency deadlines tight, or avoid lender involvement by accepting a cash offer.
Header Image Source: (Mari Helin / Unsplash)
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