You’ve found a house that makes your heart flutter, and you’re ready to make an offer. Exciting stuff! But before you sign on the dotted line, it’s crucial to understand one of the most powerful tools a buyer has: contingencies.
In our last post, we explained that contingencies are conditions in your offer that must be met for the sale to proceed. Think of them as your safety nets, or even better, your smart exit options. These are well-planned provisions that allow you to walk away from the deal (with your earnest money!) if something isn’t right or a critical condition isn’t met. While there are various contingencies you can include, some are more common and generally more critical than others.
Here are the top 5 contingencies—your smart exit options—every home buyer in Scottsdale (and beyond!) should be familiar with:
1. The Inspection Contingency: Your “Look Under the Hood” Clause
- What it is: This is arguably the most important contingency for a buyer. It gives you a set period (often 10, but negotiable) to have the home professionally inspected. You hire a qualified home inspector to thoroughly examine the property’s condition – from the roof to the foundation, plumbing, electrical, HVAC systems, and more.
- Why it’s crucial: A home inspection can uncover hidden issues that weren’t apparent during your showings. These could range from minor repairs to major, costly problems.
- What happens: If the inspection reveals significant issues, you typically have a few options:
- Ask the seller to make repairs.
- Request a price reduction or a credit at closing to cover the cost of repairs.
- If the issues are too severe or you can’t reach an agreement with the seller, this contingency provides your smart exit option to walk away from the deal and get your earnest money back.
- Don’t skip this! Waiving the inspection contingency can be very risky, potentially leaving you with a home that needs expensive, unexpected repairs down the line.
2. The Financing Contingency (or Mortgage Contingency): Your Loan Safety Net
- What it is: This contingency makes the sale conditional on your ability to secure a mortgage loan on terms acceptable to you (e.g., a specific loan amount, interest rate cap). Even if you have a pre-approval letter, final loan approval isn’t guaranteed until the lender has done their full underwriting process, which includes an appraisal and a review of your updated financial situation.
- Why it’s crucial: Life happens. Job situations can change, or lenders might find something unexpected during final underwriting. Without this contingency, if your loan falls through, you could lose your earnest money and potentially face legal action from the seller.
- What happens: If, despite your best efforts, you can’t obtain the necessary financing within the specified timeframe, this contingency is your smart exit option, allowing you to terminate the contract and recover your earnest money.
3. The Appraisal Contingency: Ensuring Fair Market Value
- What it is: Your mortgage lender will require a professional appraisal of the property. The appraiser’s job is to determine the fair market value of the home. An appraisal contingency states that the home must appraise for at least the agreed-upon purchase price.
- Why it’s crucial: Lenders won’t lend more money than the home is worth. If the appraisal comes in lower than your offer price, there’s a “gap.” Without this contingency, you might be obligated to make up that difference in cash, which can be a substantial, unexpected expense.
- What happens: If the appraisal is low, you have several options:
- The seller can agree to lower the purchase price to the appraised value.
- You can pay the difference in cash.
- You can try to negotiate a new price somewhere in the middle with the seller.
- If you can’t reach an agreement, the appraisal contingency provides your smart exit option to back out of the deal and get your earnest money back.
4. The Title Contingency: Protecting Your Ownership Rights
- What it is: This contingency ensures that the seller has a clear and marketable title to the property, meaning there are no outstanding liens, claims, or ownership disputes that could affect your right to own the home. A title company will conduct a title search to verify this.
- Why it’s crucial: You want to be sure that the person selling you the house is the true owner and that no one else can lay claim to the property once you buy it. Unexpected title issues can be complex and costly to resolve.
- What happens: If the title search reveals problems (like an unpaid contractor’s lien, property line disputes, or an unknown heir claiming ownership), the seller is typically given a period to resolve these issues. If they can’t be cleared, the title contingency is your smart exit option, allowing you to walk away from the purchase with your earnest money.
5. The Home Sale Contingency: For Buyers Juggling Two Homes
- What it is: This contingency is for buyers who need to sell their current home before they can close on a new one. It makes your offer to buy the new home conditional on the successful sale and closing of your existing property by a certain date.
- Why it’s crucial: Most people can’t afford to carry two mortgages simultaneously. This contingency protects you from being legally obligated to buy a new home if you’re unable to sell your old one.
- What happens: If your current home doesn’t sell by the agreed-upon deadline, this contingency provides your smart exit option to back out of the purchase of the new home.
- A note on this: While vital for some buyers, sellers may view offers with home sale contingencies as less attractive, especially in a competitive market, because it adds uncertainty and a longer timeline to the transaction. Sellers might prefer an offer without this condition or may include a “kick-out clause,” allowing them to continue marketing the property and accept another offer if it comes along.
Knowledge is Power
Understanding these common contingencies—your smart exit options—empowers you as a home buyer. They are designed to give you opportunities to perform due diligence and protect your financial interests. Always discuss with your real estate agent which contingencies are appropriate for your situation and the current market conditions in Scottsdale.
In our next posts, we’ll explore each of these contingencies in even more detail!
