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Which Contingencies Should You Allow?

When you put your property on the market, you may get a purchase contract from a buyer that contains one or more contingencies. Contingencies basically mean that the buyer will only follow through with the contract if certain conditions are met and that they have a legitimate means to get out of the contract if those conditions don’t occur. They also allow enough time for the buyer and the lender to get the information they need to comfortably move forward with the transaction. 

According to Homeward.com, typical contingencies include the following: 

Home inspection – Buyers have a right to know what they’re buying. A home inspection can reveal unknown problems and expenses that can impact the transaction. 

Appraisal – Your home’s contract price must meet the appraisal from the buyer’s lender. If your price is above the appraised amount, the lender won’t make the loan to the buyer. 

Mortgage approval – The mortgage terms and the buyer’s ability to repay the loan must pass underwriting, the risk standards by which the lender will safely loan money to the buyer. 

Sale of the buyer’s previous home – Many buyers have a home that must be sold before they can purchase another home. Their buyer may also have a home that must be sold, introducing a great deal of uncertainty as to whether your closing will take place on time, if at all. 

Title – The title company examines the property’s record of ownership and may discover a problem such as a lien or unpaid taxes on the property. While most problems can be resolved, delays or irreconcilable issues can happen. 

All contingencies throw an element of doubt into the equation. The question is - should you allow all contingencies? If you agree to the buyer’s requests, remember your opportunity costs. If the buyer’s home doesn’t sell, you’re out marketing time that can go against your home’s perceived value as well as great inconvenience to your plans and goals.  

Certainly, it’s fair for the buyer to know what they’re paying for, including full disclosure of the condition of your home and the boundaries of the property. An appraisal is likely to be ordered by the buyer’s bank to see if your home is indeed the same one the buyer intends to buy and that it’s worth what the buyer is willing to borrow to buy it. Since most real estate is purchased with bank loans, it’s reasonable to make sure the bank will perform. And you need a clear title in order to convey the home.  

But, one contingency to be especially cautious about is one in which the purchase is contingent on the sale of the buyer’s property because your sale won’t be finalized until your buyer’s home is sold.  

In that case, you should find out more before you sign the purchase contract. Is the buyer’s home already listed? If so, for how long? Is it under contract now? Has the buyer’s home been inspected and appraised by the new buyer? Is it still in the option period when the buyer’s buyer can back out? Is the closing scheduled soon enough that it won’t interfere with things the buyer has to get done in order to buy your property, like order an appraisal and arranging for an inspection?

There are some factors that make contingencies less of a risk for sellers. If the buyer’s home is close to closing, that could be good. If the buyer is being relocated by his or her corporation, the company may be willing to buy the buyer’s home if it doesn’t sell by a certain date. Or, the buyer may be able to get a “bridge” loan so that he or she can close on your home in time. 

Depending on the answers, you can talk strategy with your Berkshire Hathaway HomeServices network professional about the terms of the contingency. A contingency is a complication, but it doesn’t have to be a deal-breaker. Sometimes they’re necessary for people to time moving out of one home and moving into another.