While there are many steps from offer to closing, the initial written offer is still a binding contract—one that puts a buyer at considerable risk. The good news is that there are some powerful contingencies designed to protect buyers and their earnest money in real estate transactions. With the proper contingencies in writing a buyer can walk away from a deal without losing money if certain circumstances occur.
Since most properly written contingencies protect the buyer, some sellers in competitive markets will balk at buyers including too many (or unusual) contingencies. However, the more protection you can negotiate for yourself in the transaction the better. This is one of the many reasons to work with a real estate professional who can help you determine which contingencies are worth fighting for, and which are less important in your particular case.
Some contingencies should almost always be included. Sellers should not be surprised to see any of these primary contingencies in your written offer:
This contingency gives you the right to access the home with a certified inspector to assess its condition. If you find some items of concern, you can negotiate for the seller to address them. If, however, the inspection uncovers major issues, you might want to back out of the deal altogether. An experienced agent can help you to distinguish between a minor, common issue and a major item that may be a deal-breaker. In the case of a big issue, the inspection contingency would allow you to cancel the offer and recuperate your earnest money.
For most buyers, the home purchase is dependent on securing a loan. Even if you are preapproved, unanticipated situations like a layoff, title issues, or a credit mishap could potentially jeopardize your financing. Ideally, the financing contingency should cover you for as long of a timeframe as possible to protect the earnest money that is on the line. A properly structured financing contingency can protect you from the time of your initial offer all the way to the day you receive a full written loan commitment from your lender. In this case, you would have no risk of losing deposit money if you do not get the loan.
Depending on your loan program and loan to value ratio, the lender may also require a professional independent appraisal of the home. This is done to make sure that the amount you have offered is in line with the appraiser’s assessment. If the home appraises at or above the offer price, both you and the lender are happy. If the appraisal comes in low, an appraisal contingency can be a lifesaver. This clause should specify that you can either renegotiate a lower price with the seller, increase your down payment to match the appraised value, or some combination of the two. It should also give you the option to cancel the contract altogether.
In addition to these standard contingencies, other contingencies to consider adding to give yourself more protection include:
Title V Contingency
Title V is a Massachusetts regulation that requires a special pre-sale inspection of any property serviced by a septic system or private waste disposal system. If the home’s waste disposal system does not pass, a lender will not finance the home purchase. Including a Title V contingency, gives you the right to approach the seller to negotiate that they address the septic issue. If they refuse, you can choose to walk away from the sale since you will be unable to finance the purchase. In most cases, the seller will remedy septic issues. Even if a buyer can pay full purchase price in cash, the seller will typically need to lower the purchase price by more than the cost of the septic and the new buyer must still replace or repair the system within a two-year timeframe.
Sale of Your Current Home Contingency
This is an important contingency, but one to consider carefully. It can make your offer weaker in a multiple offer situation. However, if you are a homeowner already and need to sell your current home to have the funds to purchase your new home, this could be a very important protection to add to your contract. If you cannot sell your home within a specified timeframe, or if your home sale falls through, then you can get out of your home purchase deal without penalty. Properly written, this protection would cover you through the closing on your new home!
Special Types of Inspection Contingencies
Radon, Mold, Asbestos Contingency
This specifies that you can schedule additional licensed inspections to test for radon, mold, and asbestos in the home and seek remedy or cancel the sale.
Lead Paint Contingency
This contingency protects you if you choose to test for lead paint and discover it is present in the home. Lead paint is not often case for renegotiation. When buyers do test, they are usually doing so for their own knowledge. This contingency just allows them to withdraw from the deal if they are not satisfied with the lead paint test outcome.
Wood Destroying Pests Contingency
If evidence of termites or other wood destroying pests is uncovered during the inspection the contingency gives you grounds to cancel the sale and get your money back.
Most buyers do not realize the amount of protections that SHOULD be written into an offer. An inexperienced agent may not know what or how to protect a buyer against unknowns in a real estate deal. Meanwhile, an unrepresented buyer working with a seller’s agent may not realize that the agent has a financial and fiduciary responsibility to the seller. They are bound to eliminate as many of these protections as possible to benefit a seller— not the buyer of the home.
Give yourself some peace of mind and work with an experienced buyer’s agent to construct an offer that keeps you and your money safe!
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