A contingency is a provision for an unforeseen event. In the real estate industry, you will often find contingency offers on the sale of a house. Contingency offers simply mean a buyer made an offer and the seller accepted it, but the sale will progress only if certain conditions are met.
Contingencies are a practical brake on negotiations that aren’t destined to work out. They offer the buyer the opportunity to back out of the deal, usually with the down payment back in pocket. Four of the most common contingencies include home inspection, sales, appraisal, and mortgage.
An inspection contingency means a buyer will follow through with the purchase of a house only if the house passes inspection. A buyer is entitled to perform a variety of inspections and tests – such as plumbing, electricity, structural integrity, etc. – before officially agreeing to purchase the house.
These inspections are generally done at the expense of the buyer and must be completed within a specified number of days. Once the tests are concluded, if the house doesn’t pass the inspection(s), the buyer will usually request that the seller complete whatever work is needed before he consummates the sale.
Many times, buyers will realize that they need to find a suitable home before they sell their existing home. Because of this practicality, sellers will commonly find a sales contingency in a purchase offer. A sales contingency means the potential buyer of a home will purchase the “new” home only after he or she sells their existing home.
As a wise precaution, a buyer can capitalize on a mortgage contingency, meaning he or she finds a lender that will cover his mortgage loan before the sale of the house is considered complete. The buyer usually has a specified number of days to obtain a suitable lender. If he is unable to find one, he has the right to walk away with his down payment.
Occasionally, a house is appraised at a value that is less than the asking price. An appraisal contingency allows the buyer to back out of the deal before he loses money on a house. The appraisal must be done by a third-party and is hired by the lender.
At times, ambitious buyers do take the risk of paying more than the house is worth, but lenders put forth money for only the appraised value of the house – not the asking price. The buyer, of course, must pay the difference himself.
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