Buying a home is not a cakewalk. The process is structured by various funnels in the form of legal contracts, agreements, and contingencies that need to be addressed to keep moving forward in the process of buying a home.
The entire procedure of buying a home may sound intimidating, but several contingencies safeguard your interest as a home buyer. Multiple home offer contingencies are included in the legal contract that protects you as well as the seller throughout the real estate transaction.
In this article, we have listed the most important contingencies to consider, including your purchase offer if you are planning to buy your dream home. But, before that, let us tell you what exactly a contingency clause is.
What is a contingency clause?
A contingency clause is an action or condition of the “Agreement of Sale” that must be fulfilled to move the real estate transaction forward. It becomes a part of the binding sales contract when the involved parties, i.e. the seller and the buyer, agree to all the terms and conditions and sign the contract.
Home buying contingencies benefit both buyers as well as sellers. If you are buying a house, you can include various contingencies in your contract. Here are the most important contingencies that you should consider including in the contract.
- Financing Contingency
Including financing contingency in your purchase offer is a must if you are buying a home using a mortgage.
Even if you receive a pre-approval, there is no guarantee that you will receive a loan. A pre-approval marks the beginning of the process. After that, you apply for the loan and undergo the underwriting process. And, in most cases, the chances of getting a loan duck out during this process.
At this step, the underwriter scrutinizes your finances and puts their conditions on the table that you need to fulfill to get the loan. Any issue with your finances or your inability to meet the proposed conditions put the mortgage company in a position to turn down your loan request. Here, a financing contingency protects you.
Financing contingency provides you with ample time to apply for and get a loan to buy the home. If in case your deal with the financer doesn’t pull through, you can either back out of the deal or seek alternative financing sources.
- Earnest Money Deposit Contingency
Also known as good faith deposit, an earnest money deposit contingency is a deposit that you make to show your genuine interest in purchasing the property. You can decide the amount that you want to give to the seller as an earnest money deposit. As per this contingency, you have to give the deposit within a specific duration.
We recommend you consult a real estate agent before zeroing in on the amount. Submitting a higher amount makes you stand tall amongst other potential buyers. If you wish to safeguard your position in a multiple offer situation, submit at least 5% of the purchase price as an earnest money deposit.
- Home sale contingency
With home sale contingency, you manage to steal some time to search for a buyer for your current home. If you fail to find a buyer within the pre-decided duration, you can turn down the deal without facing any legal consequences. Also, the seller reserves the right to terminate the contract if you could not sell your home within the specified time.
Amongst all the home buying contingencies, this contingency ride roughshod over the seller as they take their home off the market without any assurance that they will be able to sell their home. But, the sellers have an option to protect themselves from home sale contingency by using the kick-out clause. Most sellers include the kick-out clause in the contract, which allows them to continue to put their property on the market. If they find another buyer, they give you a specified amount of time to remove the house sale contingency and keep the contract intact. If you don’t remove the house sale contingency, the seller has the right to terminate the contract and sell his property to other buyers.
- Appraisal contingency
When you apply for a loan, the lender sends out an appraiser to inspect the property and determine its fair market value. If the value is lower than the specified amount, the lender might turn down your loan. In this case, you can terminate the contract and get the earnest money back.
However, this contingency allows you to buy the house even if the appraisal is lower than the specified amount. You can negotiate with the seller to lower the price of the property to the appraisal amount. But, make sure you discuss this with the seller before the release date specified by the contingency because if you fail to do so, the contingency will be considered fulfilled, and you will be bound to go ahead with the deal proposed by the seller.
- Home inspection contingency
The home inspection contingency is one of the most important home purchase contingencies that benefit the buyers significantly. A thorough home inspection allows you to understand the real condition of the house you are planning to buy. You can even make your purchase offer contingent on inspection.
More often than not, home inspection sheds light on several issues within the home (some minor, like pests, and some grave, like structural issues). This gives you an upper hand in the deal as you get to know the major issues of the home before sealing the deal.
Listed below are some important tests that should be included in home inspections:
- Radon test
Radon is a cancer-causing gas that can be present in the home. Generally, the cost of a radon test can be anywhere between $100 and $200. If the level of radon is 4.0 pCi/L or more, consider installing a radon mitigation system to eliminate this gas. The cost of a radon mitigation system is around $1,000 to $2,000.
- Pest inspection
Another important inspection that you should consider including in your home inspection contingency is a pest inspection.
More often than not, pests cause a big menace in the home. Termites, boring bees, carpenter ants, etc, can impact the property’s structural integrity and give you sleepless nights. A pest inspection depends on the square footage of the property, but generally, it can cost anywhere between $75 and $200.
- Mold inspection
Mold can be the biggest problem in any home. They don’t just look unsightly but also cause several health issues. Hence, the majority of buyers include a mold test in their purchase offer.
The cost of mold inspection depends on the square footage of the property. Generally, it costs anywhere between $75 and $150.
Make sure the mold inspector thoroughly checks the home (including the hard to reach areas such as crawl spaces) to detect mold invasion. If the home has extensive mold invasion, you can reach out to a certified mold specialist to remediate mold.
- Foundation and structural inspection
A thorough foundation and structural inspection is the most important inspection that should be carried out to address foundation and structural issues as they can be costly to fix. Moreover, buying a property with foundational and structural issues puts you and your family at a huge risk.
The inspection is conducted by PEs or professional engineers. The cost of an inspection varies between $100 and $250.
- Roof inspection
Conducting a roof inspection should also be in your purchase offer as damaged roofs make way for mold growth and further structural damage. Generally, home inspectors do not conduct a roof inspection. In this case, hire a professional roofing company to do the job for you. But, beware of companies that eye on making a profit by suggesting new roof installation.
- Septic inspection
Issues in the septic system of a home can be very annoying. Mending them is an expensive affair and getting a new system installed can drill a big hole in your pocket.
You would certainly not want to get trapped in a property that is not well connected to the public sewers. Hence, an inspection of the septic system is mandatory.
By adding septic inspection to your purchase offer, you get the septic system inspected and pumped before the closing if it hasn’t been done in the past 6 months.
The cost of inspecting and pumping the septic system depends on the type and size of the system. Generally, it costs anywhere between $200 and $300.
- Well water test
If the home you are planning to buy isn’t connected to public water but has a well, you can add another real estate inspection contingency to your list.
Call the home inspectors to conduct a well water test. They will check the levels of nitrate, coliform, e.coli, bacteria, radon, and lead, to make sure that they are within the safe levels.
The most common finding from well water tests is high levels of radon in water, the removal of which is quite expensive.
Generally, a well water test costs anywhere between $150 and $250.
- Chimney inspection
If the home that you are buying has a fireplace, include chimney inspection in your purchase offer. Get the chimney inspected and cleaned (chimney sweep).
With this, you will know whether or not the chimney is in working condition and safe for use. If not in working order, getting the chimney repaired can cost you a bomb, and hence, it is a better idea to include it in the list of real estate offer contingencies.
The cost of a chimney inspection and cleaning is between $75 and $150.
After a thorough home inspection, you get the reports for the inspections. You can then negotiate with the seller on restoration and repair or even walk out of the deal if the damage and repair appear to be overwhelming. The latter is possible with the cost-of-repair contingency that designates a maximum dollar amount for repairs. If the amount of repair exceeds the specified amount, you can terminate the contract. Generally, the cost-of-repair contingency depends on the percentage of the sales price; for instance 1% or 2%. Certain times cost-of-repair plays contingent on home buying.
- Title contingency
A home’s title is the record of its ownership. The legal document has the record of who is the owner of the home at present and who had owned the home in the past. The document also features the record of judgments or liens against the property (if any).
Generally, your attorney or the title company is responsible for reviewing the title of the home before closing. Also, they look into the problems associated with the property and make sure that the title of the property is transferred to your name without any trouble. But, in some instances, some problems prevent the smooth transfer of title to your name. Here, title contingency comes into the picture.
If the mess associated with the property title transfer is bothering you, you can step out of the deal under title contingency. Turning down the deal prevents you from the chances of contested ownership, and you won’t have to pay anyone else’s debts.
- Permits or Certificates of Compliance contingencies
With this, you can ask for permits for making improvements to the property, such as including fences, decks, sheds, pools, building additions, free-standing fireplaces, basement living areas, etc.
If you don’t ask the seller for a permit, you make way for potential liabilities in the future. Hence, consider including permits or certificates of compliance contingencies in your purchase offer.
The bottom line
Buying a home is indeed the biggest investment that you make, and hence, you cannot afford to make any mistake. Reach out to a real estate professional or a licensed attorney to draw up a contract.
Go through the real estate contract thoroughly. Check all the contingencies and include the ones that are important to you.