One of the most important steps in buying real estate is making a purchase offer. The prospective buyer determines what they would willingly pay for the property and then submits paperwork to the seller. If the seller accepts and signs the offer, the buyer is legally bound to follow through with the sale.
The offer includes multiple pages of legal language discussing everything from the anticipated possession date to any conditions or limitations the buyer wants to place on their offer. Contingencies are a way for buyers to limit their risk when making an offer.
If the property turns out to not be what they expected or if other issues arise, they can potentially invoke those contingencies and avoid the legal and financial consequences of canceling the offer. What kinds of contingencies do buyers frequently include in their offers?
The amount you would happily pay for the property reflects what you think it is worth. The condition of the major systems in the home plays a major role in the property’s overall value.
If the inspector discovers significant issues that would cost tens of thousands of dollars to repair, an inspection contingency allows you to either negotiate new terms or walk away from the property.
Appraisal or financing contingencies
If you need a mortgage to purchase the property, the lender will typically require an appraisal. If the appraiser returns a value below the selling price, your lender may not agree to finance the transaction.
An appraisal contingency protects you in that specific situation. A financing contingency protects you if you are unable to secure a mortgage for another reason, like the sudden loss of your job before closing.
A home sale contingency
Often, a buyer’s ability to afford a new property depends on the use of the equity in their existing home. If the buyer cannot sell their home for the necessary amount in a specific amount of time, a home sale contingency would allow them to cancel the closing without a penalty.
You don’t want to put your earnest money at risk, so you need to consider ways to protect yourself when completing a very large real estate transaction. Including the right terms in your purchase offer will take some of the risk out of buying residential real estate.