Contingencies in a real estate purchase contract allows the buyer (or seller in the case of seller contingencies) to cancel the contract without breaching the contract. While contractual contingencies can be built in for pretty much anything you can think of, there’s a few common and somewhat standard contingencies for buyers: investigation, appraisal, and financing contingencies.
Right now in Oakland, Berkeley, and much of the East Bay, contingencies are often waived to better compete against other buyers. While this may be necessary to have your offer accepted, it’s often against the advice of your broker. Speak with your agent about the risks of waiving contingencies prior to submitting offers. Canceling a contract without the protection of an applicable contingency can put your earnest money deposit at risk, which can amount to tens of thousands of dollars in our market.
This contingency is often called the inspection contingency. It allows buyers to cancel a purchase contract for any discovery related to condition or any other matter affecting the property. “Matters affecting the property” is meant to be vague and covers a wide range of things buyers may care about: schools, friendliness of neighbors, volume of traffic on street, noise from nearby parks or transit, or shade cast by a nearby redwood to name just a very few.
This contingency is often used to cancel for any reason, especially when buyers get cold feet. That’s not why the contingency exists and technically a buyer can’t cancel for any reason. Yet, there’s always something new to discover related to a matter affecting the property, allowing the investigation contingency to essentially be a buyer’s get-out-of-jail-free card.
If you’re getting a loan, your lender will most likely order an appraisal of the property. The appraiser–an independent party from the lender–is meant to discover market value through sales data, making appropriate adjustments for size, location, view, condition, and amenities.
The appraisal contingency is there in case the appraiser’s opinion of value is lower than the price you offered. If this happens, the buyer may cancel, attempt to renegotiate the price, or decide to cover the gap between the appraised value and the purchase price. If the buyer doesn’t have an appraisal contingency in place, the buyer is required to make up the difference between appraised price and purchase price with additional cash, find other financing solutions, or potentially cancel–putting their deposit at risk.
The financing contingency is in place to make sure that the buyer is able to qualify for a loan at the terms specified in the contract. If the buyer discovers that they can’t qualify for a loan while this contingency is in place, the buyer can cancel the contract.
Many lenders in our area are thoroughly vetting buyers/borrowers prior to making offers, which allows an underwriter to review their creditworthiness. It may then be possible to submit offers with no financing contingency with very low risk to the buyer. Speak with your lender about the risks with your specific situation.
Which contingencies do I need?
Which contingencies should you have in place? That depends on the property, the competition, and your situation. Buyers want to have as many contingencies in place for as long as possible for their protection, while sellers want as few as possible for as short as possible. Talk with your agent about finding a happy middle ground that gives you the protections you need while staying competitive against other offers.