When it comes to selling your home, there are so many things to consider. Timing. Pricing. Marketing strategy. Staging. How about contingencies? That’s right, contingencies.
A contingency defines a condition or action that must be met by either the buyer or the seller in order to continue the next step in the contract. There are contingencies in almost every real estate contract, and they’re there to protect the buyer and the seller. If the contingencies are not met, the transaction may not close.
Often, I hear people say things like, “Our offer isn’t contingent.” But most people mean that it’s not contingent on another property selling; however, there are still other contingencies that have to be met. Let’s take a few minutes to chat about contingencies we’re seeing these days and how sellers are responding in this historic sellers’ market.
Mortgage Contingency
This means that the sale is subject to the buyer’s ability to obtain a mortgage. The Indiana Purchase Agreement has the buyer spell out the terms of their mortgage as part of the offer. They disclose the type of mortgage, interest rate cap, length of the loan, and other terms required to achieve the mortgage they’re qualified for. If the buyer is not able to obtain a mortgage with those terms, it’s possible to withdraw the contract without being penalized. This is a contingency that protects the buyer.
How buyers are avoiding this type of contingency in 2021: Cash offers.
Appraisal Contingency
If the buyer is getting financing or if they’re a cash buyer who chooses to have an appraisal, the Indiana Purchase Agreement states that “… this agreement is contingent upon the property appraising at no less than the agreed-upon purchase price.” It goes on to say that “if the buyer is not willing or able to proceed at the agreed upon purchase price, then: 1) either party may terminate the agreement, or 2) parties may mutually agree to amend the agreed upon price.”
This means that, without additional language in the contract, if the appraised value is less than the sales price, the deal could be over.
How buyers are avoiding this type of contingency in 2021: Adding “appraisal gap” language to their purchase agreement, stating that they’re willing to pay a certain amount of money OVER the appraised value, in cash, at closing.
Inspection Contingency
If there is a home inspection ordered and the house does not pass due to major defects (as defined by Indiana law) AND the seller is unwilling to remedy them (buyers must give the sellers the opportunity to “cure” defects), then the buyer has the right to terminate the contract and collect their earnest money.
How buyers are avoiding this type of contingency in 2021: As-is sales or waived inspections.
First-Right Contingency
This allows for the sale of the buyer’s current home, and it allows the buyer a specified amount of time to sell their current home before buying a new one. The contract will be voided with no penalties assessed if the current home does not sell. This protects the buyer from potentially having to pay two mortgage loans at one time. This also protects the seller, who can continue to show the home and accept a new contract without facing a penalty.
How buyers are avoiding this type of contingency in 2021: Bridge loans and short-term, temporary housing.
There are many more types of contingencies in purchase agreements: clean title, use limitations, survey requirements, and so on. Now more than EVER, you need an expert negotiator. Contingencies should be reasonable requests. Hire a broker that’s local to the market where you want to buy. Realtors know each other and local customs, and ongoing working relationships can work to your advantage whether you’re a buyer or a seller.
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