What is a contingency in real estate?

In real estate, you’ll often hear that contingencies are important! But what even is a contingency and how does it affect you as a buyer or a seller? In this post, I’ll explain what a contingency is, what the most important contingencies in a real estate transaction are, and how you can make your offer more competitive by utilizing contingency periods.

So, what is a contingency?

A contingency, in its most basic definition, is a clause in the purchase agreement that specifies an action or requirement that must be met for the contract to go through. It helps to safeguard buyers and sellers by giving them the right to cancel the contract if a condition isn’t met.

So, for example, say you are in escrow and you find out that the property that you are purchasing doesn’t appraise at the value you offered. If you have an appraisal contingency in place, you can cancel escrow and get your earnest money deposit back.

What are the most important contingencies to know?

1. Mortgage Contingency

   This is an important contingency to include if you are buying a home with a loan. It essentially means that if you don’t qualify for a loan, you can back out of the purchase. Pre-Approval is not a guarantee! Your loan still must go through the final stage of underwriting and if something happens during that time frame (a job loss for example), you may no longer be able to qualify for the loan.

2. Appraisal Contingency

   This contingency allows you to back out of a purchase if the home you are buying appraises for less than the offer amount. Your financing often depends on the appraisal, so this is an important contingency to include.

3. Inspection Contingency

   A home inspection contingency lets you negotiate the price, ask for repairs, or walk away from the sale based on the inspection results.

   In a hot market, buyers may choose to pass on the home inspection contingency to make their offer more competitive. While this can help, it can also be risky if items on the property are in bad condition.

How to use contingencies to make your offer more competitive?

Each of these contingencies has a standard period of 17 days (in California). In order to be more competitive, you can shorten those time periods or waive the contingencies all together. To the seller, this looks like a “cleaner” offer because theres is less likelihood that the deal won’t go through.

For more clarification or to write your own offer on a property in the LA Area, contact Megan Majd at (310) 845-6209 or here.