How to Handle Home Buying Contingencies

Although the vast majority of real estate offers contain a "financing contingency," there are other contingencies that are often included in an initial offer. They can sometimes represent stumbling blocks along the way to closing. Sellers—and buyers—should realize that contingency clauses offer protection and options for both sides. Knowing how to deal with real estate contingency requirements is vital.Here are six common contingencies:

Financing

The financing contingency simply means that if the prospective buyer cannot, within a reasonable time frame, secure home financing at a rate and with terms that are specified, the offer to buy is withdrawn. In today's competitive market, an increasing number of buyers seek pre-approval, which simplifies the entire process for both buyer and seller.

Sellers who receive multiple offers invariably favor buyers with pre-approval letters, knowing that their chances of a hassle-free sale are better. Inability to secure appropriate financing gives a prospective buyer the right to walk-away with no adverse consequences.

Home Inspection

Most buyers request an independent third-party home inspection. It offers a level of protection to the buyer by noting possible areas of concern, but offers no estimate of repair or replacement cost. The inspection fee is borne by the buyer, and the report is delivered to the buyer or the buyer's agent.

Based on the inspection report, an Anchorage buyer may decide that a home's condition does not merit further discussion, and simply withdraw the offer. Sometimes, a seller agrees in advance to make requested repairs up to a specific dollar limit. At other times, items noted in the report become the subject of negotiation. But, in the end, either party has the right to cut off discussion and cancel the contract.

Existing Home Sale

In many parts of the country, an offer might be submitted "contingent upon sale and settlement of existing property". In an active market, this might not be a huge risk, but there is typically a time limit included, perhaps 30 or 60 days. It can be of benefit to the buyer in a hot market, allowing a family to begin looking for a new home prior to listing (or closing) their existing home. There is a bit more risk for the seller, because homes with an existing contingent contract typically do not generate additional traffic and are effectively "off the market" for the duration.

Appraisal Contingency

Lenders insist that appraised value of property justifies the loan amount, so an appraisal contingency clause is typical. If there is a discrepancy, the seller may agree to reduce the price, the buyer may pay more in cash, or the contract might be canceled by mutual agreement. If the difference is great enough, it almost always results in a negated contract.

Employment

An employment contingency clause might be requested to give a military or corporate buyer an out in case orders do not come through or a corporate transfer is canceled. Again, the time frame is typically short, because the property is effectively off the market until the contingency is cleared.

HOA or Subdivision CC&Rs

Planned developments, vacation properties and condominium communities sometimes have extensive restrictions and requirements. A buyer can conceivably want to request a legal opinion or have additional time to review the documents in depth.

Other Contingencies

Other contingencies when buying a home include septic, neighborhood, water well and utility contingencies. The septic and water well contingencies will allow a buyer a certain amount of time to conduct inspections of the septic system to make sure it is in proper working condition. An water well expert can also determine the quality and quantity (flow) of the existing water well. A neighborhood and utility contingency might allow a buyer a certain amount of time to explore the immediate neighborhood or make sure that all the utilities desired for the home are either in place or can be obtained.

There is no limit to the number of contingencies that can be included in a real estate contract. But, in a strong market or an area where quick sales and above-list offers are the norm, an offer with multiple contingencies will almost certainly not be considered as strong and appealing as a more straightforward offer with fewer options for either side to back away.