Contingencies: An Introduction

If you are going to buy, sell or invest in real estate, understanding real estate contingencies can avoid costly mistakes and give you more control over the buying process with a “get out” clause if things don’t go as expected. During the last 2 years in the Bay Area, buyers waived all contingencies in their offers just to be considered seriously by sellers. But now with the market cooling, contingencies are back in play! Contingencies play a crucial role in potential future negotiations and protecting the buyers initial deposit.

What is a Contingency?

The real estate contingency definition is something that all buyers, sellers, and agents should be intimately familiar with. So, what is a contingency? Simply put, A contingency gives buyers the right to back out of their contract with a deadline. It acts kind of like a first right of refusal in the sense that you are securing the property under certain circumstances, and if they change during the contingency period you can refuse to purchase and retrieve your initial deposit.

Most Common Types of Contingencies

Although there are many continency options, the most common ones are appraisal contingency, loan contingency and inspection contingency. So, for example, if you do an appraisal contingency and the property doesn’t appraise, and you don’t want to continue with the purchase, as long as your contingency hasn’t been removed you can cancel the contract and get your deposit back. However, if a buyer attempts to back out of the contract and there are no contingencies or contingencies have been removed, the initial deposit is at risk and seller may make claim.

Most contracts today require a 3% initial deposit and there’s a reason for that. Most contracts have a liquidated damages clause that states that buyer and seller can only go after each other for 3% maximum if something were to be in breach of the contract. So that initial deposit buyers put into escrow is the 3% is what buyers could lose if the buyers don’t perform on the contract.

Why It’s Smart To Negotiate Contingencies

Contingencies are not just to protect the initial deposit, but also can be used as a strategic tool in future negotiation on the contract prior to removing contingencies. For example, if the property didn’t appraise, buyers could come back and renegotiate the price to something closer to the appraised value prior to risking losing their deposit. Another example, is if a buyer does their own inspections and discover something that affects the material desirability of the property, for example it needs a new roof which is a big-ticket item, the buyer has negotiation power with the sellers to receive a credit for the previously undisclosed material defect. There are always exceptions to the power of negotiation with contingencies when there is a ratified back up offer for the same price or higher, the sellers will likely not negotiate.

Whether you are buying or selling a home, contingencies are going likely going to be a part of the transaction. If you need a Real Estate agent, I’d be more than willing to help you. So if you are looking at the option of buying a home or selling a home in the San Francisco or the Peninsula in the near future please reach out to us.