Common Contingencies In A Real Estate Contract
Eric Stewart ● April 28, 2015
When buying a home, most people think the biggest hurdle is settling on the sales price, which many times becomes a negotiation between the buyer and seller if the buyer does not offer to pay the asking price.
However, in the purchase agreement, a home buyer can also put in various contingencies, which if not met, can allow them to opt out of the purchase of the home without penalty.
This is one of the most important contingencies in a real estate transaction. If you are getting a loan for your home, most buyers provide a pre-approval letter from a mortgage lender in their offer. However, the mortgage agreement can fall through (loan is denied) between the date the purchase agreement was ratified and the day of closing. If this should happen, the buyer can get out of the contract under the financing contingency.
The appraisal helps the lender determine if the property is worth the sales price. The appraiser will look at the property’s details, as well as side-by-side comparisons of similar properties in the area. In some cases, the home may appraise for less than the purchase price. A home appraisal contingency gives the buyer a chance to renegotiate the purchase price to reflect the appraisal, or to back out of the deal entirely.
A home inspection often uncovers issues that were not noticed when the buyers first saw the home. Home inspectors will review both the exterior and interior of a home. When the inspection is completed, the inspector will issue a report including a list of recommended improvements. If the buyers are not happy with the results of the inspection, they can void the purchase agreement. Or, if the buyers want to proceed with the contract, they can request repairs from the seller. Seller repairs can also turn into a negotiation, which is typically handled by the real estate agents representing the buyers and sellers, respectively.
A termite inspection is conducted independently of the home inspection and is usually required by the lender. While a buyer cannot back out of the contract due to termites, any infestation or termite damage that is found during the inspection must be taken care of by the seller of the property. If the buyer is purchasing the home in “as-is” condition, the termite contingency is usually struck and no termite inspection is performed.
Radon Gas Inspection
Radon is an odorless and colorless gas that has been found in homes throughout the United States. Every home has some level of radon. The higher the level, the more likely radon mitigation may be necessary. Levels of radon are measured in picocuries and the maximum recommended level in the U.S. is 4pCi/L. Installing a radon mitigation system will draw the radon gas out of a home and disperse it into the air. Radon mitigation is usually easy and accomplished for less than $1500. Sellers are expected to pick up the cost of the system installation. Alternatively, buyers also have the option to void the purchase agreement should radon testing indicate the radon level is about the recommended amount.
Homeowner Association/Condo Association Documents
Buyers have the right to review any legal or financial documents connected to the community. The buyers also have right to cancel the purchase agreement based on these documents. The timeframe to review varies by state. For example, in MD and VA, the time is 7 and 3 calendar days, respectively. In DC, buyers have 3 business days. Buyers should pay attention to fees, rules and regulations, pending law suites against the association, and anticipated major renovations to the community or special assessments.
Sale of Current Home
This provision makes the sale contingent upon the sale of the buyer’s current home. If the buyers are unable to sell their current property, they have a legal way out of the purchase agreement. Most sellers are reluctant to accept an offer with this contingency, and often only do so as a last resort.
Other contingencies/inspections that a buyer may put in the contract include:
- Mold – Every house has mold, but only some kinds of mold are unhealthy
- Lead Based Paint – for houses built prior to 1978
- Septic and well inspections to be sure the septic tank is not leaking and is clean, and to be sure the water is potable
- Survey of property boundaries to be sure encroachments from neighbors don’t exist
- Structural – when evidence suggests an engineer may be necessary to ensure the home’s foundation and structure are sound
Be Careful Of What You Ask For
While these contingencies can protect buyers, giving them a legal way to back out of a home purchase, they can also make their offer less appealing to a seller. We recommend always speaking with your agent and exercising good judgment when including contingencies in your contract. One contingency too many, and you could lose the home of your dreams.
For other tips on buying a home, download our free Savvy Buyer Guide!