If you’re out looking for a house, eventually the time will come when you will have to make an offer on a house. Offers are most commonly presented in the form of a purchase agreement, or contract if you prefer. Just as a reminder, purchase contracts include the following sections:
- The agreed-upon price
- The earnest money deposit amount
- Property address and description
- Terms of sale
- Date of the final walk-through
- Closure date
- Home buyer’s contingencies (if any)
When you write your purchase agreements, whether it’s with the help of a real estate agent or on your own, you will notice that the last part is called “contingencies”. This is one of the most important parts of your offer since it’s the part that gives you a way to back out of it without any consequences if the other party doesn’t meet the requirements or if you don’t feel comfortable with the contract overall.
While you may include as many contingencies as you want in your purchase offer, you want to avoid including too many of them that will scare the seller away. However, make sure to include the following basic ones at a minimum:
Home inspections are critical when you’re buying a house, especially if it’s an older property. In fact, home inspections are the single most common contingency that is included in almost all purchase agreements. They will give you a clear picture of the condition of the house beyond what a general examination of the exterior and interior can offer.
Some common home inspections home buyers usually ask for are:
- Lead-based paint on the walls because this substance is a major contributor to deteriorating health
- Wood-destroying pest inspections to ensure you won’t have to bother with those pesky pests
- A roof inspection to confirm that the roof is not damaged since it’s an expensive repair
- Sewer inspections to make sure they don’t clog often or that their condition isn’t deteriorating
- Inspections for mold, radon, asbestos or any other harmful substances
You can add various other home inspection conditions that you believe are necessary. Once the inspections are done, you will receive a report by the inspector which will contain information about their findings along with some advice on how to fix these problems. If there are some minor damage or safety issues you can issue a request for repair for the current homeowner. They can accept or decline it, but both cases will allow you to negotiate on the price, the repairs or walk away from the deal if the problems seem too much to handle or too costly.
If you’re buying your house by using a mortgage you need to make sure to include a financing contingency clausula. This will give you the time to apply for a loan you will use to purchase the home. In most cases, this includes a condition that allows you to find alternative sources of financing if banks decline your request or if you’re not able to find the finances, back out of the deal.
The biggest problem that arises the need for a mortgage financing contingency is pre-approvals. It’s not rare that a buyer gets pre-approved for a loan by the bank and think that their financing is set in stone when that’s not really the case. There is a big difference in getting pre-approved for a loan and going through the underwriting process that will give you final loan approval. During this underwriting process, an expert takes an in-depth look at your credit history and your current financials to make a list of conditions you will need to meet in order to receive a loan. If you’re unable to meet these conditions or the underwriter finds a problem with your finances, the mortgage company can and will decline your loan request. If this happens, the mortgage financing contingency allows you to leave the purchase deal without any consequences.
When a mortgage is involved in the deal, the most common course of action for the lender is to send an appraiser to estimate the house’s value because this will convince them that the house is really worth what you’ve agreed to pay for it. In some cases, the property will be appraised at a lesser value than its asking price, so by adding a home appraisal contingency you can negotiate a better, more realistic price or walk away from the deal if the property is overpriced. To put it simply, if the price of the property is $400,000 and your appraiser valued it at $380,000, you can renegotiate the price with the seller at a more realistic level or back out of the deal if you don’t feel that the price is still realistic enough.
However, this brings out another issue, a financing one to be more precise. When a financial provider gives you a mortgage loan, you can loan you only up to the fair market value of the property. This means that you will need to cover the difference between the asking and the fair market value price (if the latter is the lesser one). In our case, you will have to make up for the $20,000 difference between the greater fair market value ($400,000) and the lesser appraised value ($380,000). If you’re unable to renegotiate the price with the seller or don’t have this money saved in some hidden safe, you would have to turn to alternative sources of financing which may be difficult to find. When this happens, you can use the home appraisal contingency to walk out of the agreement.
Sale of Current Property
It’s not rare that buyers don’t have enough finances to pay for the house or can’t apply for a mortgage loan that high to cover the price of the property. The easiest solution in these cases for those that own another property while making an offer for another one is to a part in the offer that says they will buy the house only after they sell their current property.
This gives the buyer 2 advantages:
- The buyer can back out of the agreement if they are unable to sell the current property in time and
- The buyer will buy the property only when they sell their property and have enough finances
The only problem with this contingency comes up when the market is leaning more towards a seller’s market and multiple buyers are competing for a single property as it puts the buyer in a disadvantageous situation. However, if you’re doing this in a buyer’s market, this is more than beneficial for you as a seller because the market inclines the sellers to accept these types of offers.
Of course, when you’re buying a house you want to have a clean house, both physically and legally, and the second one is frequently more important than the first. This mostly revolves around the documentation and legal background of the house. Is the property legally built? Are all property titles clear and transferrable? Has the previous owner paid all his/her liabilities on time? You can only find out the answers to these questions by getting clearance on the following documents:
- House titles – this will allow you to check all the previous and current owners of the property, as well as information on the ability of a seller to transfer a clean title to a buyer along with information on covenants, conditions and restrictions (CC&R).
- Homeowner’s Association documents – these will prove that all fees are paid and that the HOA is financially stable which will ensure the costs and fees won’t drastically increase.
- Report of statutory disclosures – or disclosure on all known material facts, which can include transfer disclosure statement (TDS), natural hazard disclosure statement, special taxes, and statutory supplemental questionnaire.
Some municipalities have special regulations and mandatory contingencies that need to be included in the purchase offer. Although they can be a double-edged sword at times, contingencies are mostly here to protect your interests as a buyer.
As we mentioned before, you may include as many or as few contingencies as you want, but at minimum, make sure you have the basic ones in this list. This way, you will make sure that buying the property is the right thing to do or if it isn’t, have a safe way out.