If you’ve entered into a purchase on a home, you may be wondering what are these contract contingencies my agent keeps talking about? Very simply, it’s an uncertain condition that has to be met or you may cancel your contract.
You have several contract contingencies in your home purchase contract if you are using a California Realtor®. There are appraisal contingencies, loan contingencies, inspection contingencies, HOA contingencies as well as disclosure contingencies, among others. These are meant to protect you should conditions arise that you didn’t expect. In that case, you could cancel the contract and receive your deposit back.
Your contract (this is the offer you signed and sent) specifies which ones you have included within your offer as well as how many days you have to release those contingencies. You’ll have to review with your agent what works best for your situation, but here is a summary and explanation of the most common contingencies. The magic number for releasing most is typically day 17.
-Appraisal Contingency. An appraisal contingency means that if the appraisal the bank does comes back and does not support the sales price you have offered to buy at, you may cancel the contract. It doesn’t mean you have to cancel…you could always renegotiate a lower price or pay additional money down to satisfy the bank’s requirements.
-Loan Contingency. The loan contingency is in place to assure you (as much as possible) that you will be able to get a loan on the property and at the terms you had planned on. Your lender will let you know when you have bank approval on your loan.
-Inspection Contingency. You should always do a home inspection. Keep in mind that the inspector will always find something and most of the time they are simple, smaller things that either the seller will agree to fix before the sale or that you can live with and handle after you close. Sometimes, however, there are problems you just can’t get past…maybe there are major foundation issues or you find out the roof is in disrepair and you, nor the seller have the funds to take care of that. It might also be that there is nothing major, just too many things that will task your budget beyond what you are comfortable with. In that case, you may cancel.
-HOA Contingency. In homes that are part of an HOA, sellers will need to provide the HOA documents to the buyer. This should include the HOA budget, rules and minutes of meetings. If you discover that there is a major assessment looming or maybe they have a rule against dogs over 20 lbs and you have a golden retriever, this is your out on the contract. HOAs are notorious for taking forever to get the documents during escrow.
-Disclosure Contingency. Most often times, you will receive your disclosures from the seller at the time of your inspection. Review them in detail, if it tells you something you can’t live with, again this is your out. Maybe there was a death on the property in the last three years or you find out there is a ton of airport noise you hadn’t noticed yet.
-Sale of Current Home Contingency. This one applies when the buyer needs to sell a home prior to the sale. You will likely be given a time period within which you need to be in escrow and closed on your current property. How flexible sellers will be of this option is generally completely dictated by the market.
Essentially, these are a buyer’s way out of a contract if what you find out or circumstances expected don’t go as planned. In most cases, buyers would be able to receive their deposit back upon cancellation of the escrow. However, make sure you always review these with your agent. Each case is different depending on your particular contract has been written—another great reason to always work with a great Realtor®--like me!
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