Questions: We’re making an offer on a home that has been on the market for a few weeks and want to include contingencies, what is normal?
Answer: Contingencies can be used by buyers to reduce their risk in a real estate transaction by allowing them, in specifically defined scenarios, to renegotiate contract terms or cancel a contract without losing their Earnest Money Deposit. The three most common contingencies are the home inspection contingency, financing contingency, and appraisal contingency.
The shift in market conditions over the last 3-4 months has meant adjusting from a market where most winning offers did not include any contingencies to a market where many buyers can include at least one or two contingencies, often all three. This week I thought it would be helpful to refresh everybody’s understanding of the three most common contingencies and what protections they provide to buyers.
Home Inspection Contingency
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Purpose: Allows buyers to hire a licensed home inspector who will provide a detailed assessment of a home’s condition and recommendations for repair, replacement, and maintenance.
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Structure: The inspection contingency offers two options. One is the ability to void the contract after the inspection and the second is the option to void and the option to negotiate for repairs or credits based on the results of the inspection.
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Timeline: In most cases, I see inspection contingencies last 3-10 days and if there is a negotiation period, those often last 2- 5 days.
Financing Contingency
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Purpose: Protects buyers if they do not get approved for their loan and allows them to void the contract or delay closing without losing their Earnest Money Deposit.
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Structure: The financing contingency can either automatically expire at the end of the contingency period or extend to the closing date unless the seller takes formal action to remove it after the contingency period ends.
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Timeline: In most cases, I see financing contingencies last 10-24 days. It is a good idea to consult your lender on this timeline.
Appraisal Contingency
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Purpose: Protects buyers in the event the property appraises for less than the contract purchase price. It allows a buyer the option to void, renegotiate, or proceed.
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Structure: In some cases, through a separate addendum, buyers may agree to waive a specified difference between the appraised value and purchase price and make the appraisal contingency only if the appraisal value is below a certain number.
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Timeline: In most cases, I see appraisal contingencies last 10-24 days. It is a good idea to consult your lender on this timeline.
As a buyer, it is important to understand that the use of, structure, and timeline of contingencies in your offer play a significant role in how a seller responds to your offer. In some cases, contingencies (or lack of) may have a greater influence on negotiations and a seller’s response than price, so it is important to approach contingencies thoughtfully and strategically based on your interest in a home, days on the market, and an assortment of other factors.
If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at [email protected].
If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to [email protected]. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.
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Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH Real Estate, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.
