Most Common Contract Contingencies Explained

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 are able to 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

  • 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.
  • Structure: The inspection contingency offers two options. One being the ability to void the contract after the inspection and the second being the option to void and the option to negotiate for repairs or credits based on the results of the inspection. 
  • 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

  • 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.
  • 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.
  • 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

  • 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.
  • 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.
  • 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 market, and an assortment of other factors.

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Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH | @properties, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.

Question: What does it mean to buy a home as-is and are there ways to mitigate the buyer’s risks?

Answer: Occasionally sellers offer homes for sale “as-is” and it presents a good opportunity for buyers to purchase below market and earn some sweat equity. These homes tend to be run down, require significant repairs and most owners don’t want to deal with anything other than signing the paperwork to transfer title. Homes may also be offered as-is when the seller doesn’t know anything about the property (e.g. acquired through inheritance).

Last week, I explained that Virginia is a “Buyer Beware” state (Caveat Emptor), which means that sellers do not have to disclose any problems to buyers and the burden of discovery falls strictly on the buyer. As such, selling a property as-is isn’t too different than a regular sale of property in Virginia, but there are a few negotiable differences and while a property can be marketed as-is, it doesn’t mean anything until these changes are explicitly agreed to:

  • There is no requirement to clean or remove debris. The standard is for the property to be free of trash/debris and broom clean.
  • The seller is not responsible for addressing any wood destroying insect/termite issues. The standard agreement requires the seller to pay for this.
  • The seller is not required to fix any Homeowners Association violations on the physical condition of the property.
  • The seller is not responsible for providing working smoke detectors.
  • The seller is not responsible for compliance with notices of violation from local authorities

You should be able to assess the amount of trash/debris and existence of working smoke detectors pretty easily. You can contact Arlington County about any outstanding violations. If you’re buying into an Association, the delivery of a resale package (documents like by-laws and budget) is a non-negotiable requirement and will include any outstanding violations. Wood destroying insect/termite tests are cheap and easy and can be done in conjunction with a pre-inspection or pass/fail inspection (see Mitigating Risks To A Homeowner).

What About Home Inspections?

The list above represents what the Northern VA contract says about as-is sales, but in reality, what most sellers mean when they offer a property as-is is that they intend to deliver the property in its current condition and aren’t interested in fixing anything. I always recommend my clients include a full home inspection contingency in their offer, which allows you to negotiate fixes or seller credits based on the findings of the property’s condition, but don’t expect a seller marketing a home as-is to agree to a full inspection contingency. While investors (teardowns and flips) don’t mind, it puts homeowners in an uncomfortable position.

Mitigating Risks To A Homeowner

  • Select a Contractor: If you’re planning a major renovation, I strongly recommend selecting your contractor ahead of time and asking them to do a walk-thru of the property with you before you make an offer.
  • Pre-Inspection: You can order a full home inspection prior to making an offer. The downside is that you’re paying for an inspection (usually $500-$600 for a single family home) before you’ve signed a contract, but the benefit of being fully informed on the condition of the home is worth it. Make sure you get permission from the seller before ordering a pre-inspection. Pre-inspections are popular in Washington DC right now because of how competitive the market is for buyers, who are often forced to remove the inspection contingency for their offer to be considered.
  • Pass/Fail Inspection: It’s possible to amend the standard inspection addendum to create a pass/fail option by eliminating the right to negotiate based on the property condition. The result is you can inspect the property and make a binary decision – void the contract or move forward with the purchase. This provides you the opportunity to inspect for major problems (e.g foundation issues) and walk away if necessary.
  • Talk To Neighbors: Introduce yourself to a few neighbors and ask them about the home you’re considering purchasing. Neighbors are often aware of major issues with nearby homes or whether the previous owner took care of the property, so don’t be shy.

I’d love to hear from readers about their experiences buying as-is properties and any creative ways you used to mitigate the risks.

Question: Should I accept an offer on my home that is contingent on the buyer selling his home first?

Answer: While there are financing options and other strategies to help buyers avoid home sale contingencies, they’re oftentimes necessary to close a deal. Before you accept an offer that includes a home sale contingency, you should consider the following factors:

Which Home Sale Contingency?

1) Sale of Buyer’s Property with Kick-Out:

This is used when a buyer’s property does not have a pending contract and can be used even if the property isn’t yet listed for sale. It includes a deadline for the buyer to go under contract, terms of the listing (when it will be listed and for how much), and most importantly, it allows you to “kick-out” the buyer, with notice, to accept another offer or put the home back on the market as Active. This is a high-risk contingency for sellers.

2) Settlement of Buyer’s Property (no kick-out):

This is used when the buyer’s home is under contract and pending settlement. Depending on the terms of the contract on the buyer’s home, this can be a fairly low risk contingency for sellers.

Kick-Out Clause

If contingency #1 above is used, you have the ability to continue marketing your home for sale and accept back-up offers from other buyers. If you receive a better offer, you can “kick-out” the current buyer unless they can provide proof of a ratified contract on their home or proof they can purchase the home without first selling their home. You will negotiate the number of days the buyer has to meet one of these requirements, once you’ve given notice, so it’s in your best interest to keep the number as low as possible.

Review All Relevant Data

If contingency #1 above is used, you and your agent should conduct a full market analysis of the home the buyer is trying to sell to determine the likelihood that it sells in a timely manner at the price it’s being offer for. If you learn the home is in a market with average days on market of 100+ days and the buyer is offering it at a price above market value, you have a bad offer.

If contingency #2 above is used, you’ll want to review the terms of the ratified contract your buyer has to determine what contingencies still exist. If all contingencies have expired and a substantial Earnest Money Deposit has been made, you can proceed with confidence. However, I’ve seen offers made where the buyer’s ratified contract includes a home sale contingency itself for the buyer of that property, meaning my client had to rely on two homes to sell before his home could sell…bad offer.

Days On Market

You should also assess where you are in your sale cycle. If you’re in the first 30 days of your listing, you should hold out for strong offers and avoid a risky home sale contingency. Just like you wouldn’t normally accept a deep reduction from the asking price in the first 30 days, you should also push for strong supporting terms.

Other Terms

If you’re considering accepting an offer that includes a home sale contingency, work hard to negotiate favorable terms elsewhere, especially price. You deserve to be compensated for the additional risk a home sale contingency presents.

Before accepting an offer with a home sale contingency, you and your agent should work with the buyer and buyer’s agent to explore strategies that allow the buyer to qualify for the purchase without first selling their home. Often, it’s more feasible than buyers realize.