Taking advantage of contingencies as a buyer


Taking advantage of contingencies as a buyer:

Contingencies in a real estate contract are conditions and periods of time that must be met for the contract to close. Common contingencies in a real estate contract include the due diligence contingency and the financing contingency. Other contingencies can be written into a contract, but this post will focus on these two common ones.

The benefit for you, as a home buyer, of having these two contingencies is that they provide you with the opportunities to back out of a contract that, for unexpected reasons, will not work out for you. This is because they create conditions that allow you to withdraw from the contract without legal consequences. If you withdraw from a contract outside of a contingency, you are vulnerable to a lawsuit to force you to complete the purchase of the home.

Now that we know the importance of having contingencies, we can discuss two common types of contingencies that I have seen come into play for home buyers.

The due diligence period is an essential time when you first go under contract to buy a home. This period of time, negotiated in the contract between you and the seller (through your agents), is for you to order and conduct the inspections necessary for you to determine whether you want to continue with the purchase of the home. If the inspection turns up unanticipated problems, then you have the ability to withdraw from the contract. Once you have the results of the inspection, you can negotiate a Repair Addendum (SC) or an Amendment to Address Concerns (GA) to get the seller to make certain repairs as a condition of you buying the house. During this negotiation, which also takes place in due diligence, you can still withdraw if the seller is not agreeing to make enough repairs for you to feel comfortable buying the home. Unless otherwise specified in a contract, due diligence ends at midnight on the last day of the agreed upon period.

A recent example from my business of a buyer withdrawing from a contract under the protection of due diligence was when our home inspector found evidence of an active sewage leak under a home. The cost of repairing and cleaning the crawl-space was too much for the seller to take care of, and the home buyer was not interested in taking on that kind of repair after closing. We terminated the contract without any penalty to my client. Because major issues that may not be immediately obvious during a showing can always come up in an inspection, it’s important to hire a reputable inspector and to take full advantage of your due diligence period.

The second commonly used contingency is the financing contingency. This contingency only applies to home buyers who are using loans, not to cash buyers. This contingency is a period of time, negotiated in the contract, in which you, the buyer, need to obtain written confirmation from your lender that you are able to secure a sufficient loan to buy the home. If the bank determines that you are not able to secure the loan, for example, due to a new debt being taken on, they will issue a loan denial letter. With this, you can safely withdraw from the contract. This is why communicating with your loan officer quickly after getting an offer accepted.

There is a third common type of contingency for home buyers who are also selling their homes, which will be discussed in another blog post.

I always help my buyers take full advantage of the terms of their contract. If you or someone you know is looking to buy soon, please reach out to me!