When it comes to real estate contracts for buying or selling a home, contingencies hold the key to either big savings or large potential losses. What do you need to know about them?
Gambling on Contingencies: Are You Feeling Lucky?
As a homebuyer the main questions is how many contingencies can you get away with in your offer to purchase a home?
A contingency is a condition (or clause). In other words, you are making an offer to buy a home provided certain conditions are met. The more contingencies the better for buyers; they provide more opportunities to walk away, ensuring a refund of the deposit money if something turns up they don’t like. However, demand too many contingencies and your offer could get shot down by sellers who are afraid you may walk away.
So are you feeling lucky
What’s more important to you? Making sure you land this home or making sure you don’t end up losing your precious capital?
What you can get away with often depends on current market conditions. At the end of 2011 the Chicago Tribune reported that multiple contingencies were becoming more acceptable as homeowners have become more desperate to make deals. However, just weeks into 2012, Florida real estate agents were reporting that banks were refusing even standard contingencies such as the right to inspect a home when taking offers on bank-owned properties.?
What Contingencies Should I Include in My Purchase Offer?
There are many potential contingencies that you may want to include in your offer. In fact, buyers can dream up almost any contingency they feel like. Whether it gets accepted can be a completely different story, though.
The most common, and the answer you will most often receive when asking, “What does buying a house on contingency mean?” is an offer contingent on the buyer selling his or her current home. Few people want to take on a new mortgage until they have rid themselves of their old one. This makes sense, but in the past it has led to long chains of contingent contracts, which could easily crumble if one link is broken. This means it is highly unlikely you will get an offer like this accepted unless you can prove your home is already under contract and the buyer’s financing is approved.
Five more common contingencies to contemplate:
1. Appraisal Contingency
Appraisal contingencies state that the buyer is entitled to cancel a contract and receive a refund of their deposit if the property does not appraise for a minimum amount (normally the purchase price).
2. Financing Contingency
This is perhaps one of the most useful for buyers and the easiest to manipulate. This makes the contract contingent on the buyer’s ability to obtain financing at a certain loan-to-value, interest rate and term. If not, the buyer may cancel, and if the buyer can’t provide proof of a mortgage commitment in a specified period of time, the seller can boot the buyer. However, making an offer contingent on 100 percent financing at a 4 percent rate is unlikely to get accepted. While an offer specifying a 70 percent LTV and a max rate of 7 percent is going to be much more attractive.
3. Repair Limits
This gives the buyer an out should the required repairs be found to exceed a specific dollar amount or percentage of the purchase price. However, most properties are now sold exclusively on an “as-is” basis.
Investors looking for bargains on properties that can hold big profits if the usage can be altered will want to use a zoning contingency. Getting your hands on a prime lot, which now holds a single family home but which could allow for a condo building or hotel, could produce massive potential.
5. Spousal or Partner Approval
Speed is essential today. Offers can stack up in hours and if yours isn’t in, you could either be stuck in a bidding war or just flat out of luck. Making your offer contingent on your spouse’s or partner’s viewing of the property can make sure you are in the running without committing 100 percent. This allows investors to confirm hunches on the potential value and has probably saved many marriages as well.
The Secret Golden Clause
A “kick out” clause is used when a contract is contingent on selling the buyer’s current home. It allows the seller to continue to market the home to other buyers. If a qualified buyer makes an offer on the home, the seller gives the previous buyer a time limit to either remove or exercise the contingency.
The kick-out clause must be carefully drafted to protect the seller. This is one of those situations where a real estate attorney should be consulted.
Making Backup Offers
What does buying a house on contingency mean for others who are interested? You shouldn’t just pass over homes you like because they are already under contract. Deals fall apart all the time for all types of reasons, especially when they have many contingencies. If you like it, ask your real estate agent to submit a backup offer or perhaps you can even get the current offer kicked out!