When you’ve got your home listed, getting an offer can be exciting. And, in today’s market, it’s more likely you’ll be looking at multiple offers at one time. Comparing those offers can be a challenge, particularly when it comes to understanding the contingencies that you might see. Read on to learn what you need to know as the seller.
Three common contingencies
While these are common contingencies, that doesn’t mean you shouldn’t pay attention to them. Each can derail the deal. That being said, unless they are paying in cash, buyers and their lenders are likely to insist on one or more of these contingencies.
Consider yourself lucky if you receive a contract without at least one of these three contingencies—in which case, you probably have a cash buyer. Because of the increased competition among homebuyers, offers that waive one or more of these contingencies are more common, as buyers seek to get the edge.
Appraisal contingency: As its name suggests, a purchase offer that includes an appraisal contingency usually states that the buyer has the option to void the contract and have their earnest money returned, or negotiate a lower price, if a property does not appraise for at least the contract price. Due to the strong seller’s market, buyers may offer to put additional cash into the deal, up to a certain point, to make up for an appraisal “gap” rather than asking the seller to come down in price.
Financing contingency: This contingency can take many forms, but the most common includes language stating that the buyer’s ability to move forward with the contract is dependent upon his or her ability to successfully secure financing for the necessary loan amount.
Inspection contingency: This type of contingency relates to the home’s condition as evaluated by a professional home inspector. It typically is used as a safety net in instances where something costly or impactful turns up on the inspector’s report.
Other contingencies
While the above three contingencies are the most common, they aren’t the only contingencies you could see. It’s true that a strong seller’s market offers conditions that typically result in fewer contingencies added to contracts, but that doesn’t mean you won’t see any.
Examples of other contingencies include a buyer making the contract contingent upon their ability to sell an existing home. This contingency is less common in a seller’s market where home sales occur more rapidly. But, if you see this contingency, consider that your contract would rely on two sets of buyers successfully securing financing and not just one.
One of the more unusual contingencies that have been used are the buyer wanting to have a feng shui specialist determine whether the home had the right energy in order for the contract to go through. Other unusual buyer requests have been to make the sale of the home contingent upon the homeowner including their dog or other pet in the sale. A buyer’s fixation on a piece of furniture or decor can also end up being included as a contingency on the contract.
Reducing the risk
As the seller, the decision to accept an offer containing one or more contingencies must be weighed against the likely risk. For example, a financing contingency can be a managed risk if you evaluate the buyer’s financial standing. This might include asking for a letter from their lender or proof of funds. A sizable down payment is another positive indicator that the risk of financing falling through is low.
Other examples of reducing risk include having an inspection of your home prior to putting it on the market, so any “surprises” can be addressed. To ensure there are no hiccups over the appraisal, avoid the urge to overprice your home in a seller’s market.
In the case of a contingency dependent on the sale of the buyer’s existing home, you may want to respond with a kick-out clause that keep your home on the market and gives the original buyer 24-72 hours to remove the contingency, should you receive an offer without such contingency.
Contingencies can seem nerve-wracking, but as with most risk, they can be managed and the risk reduced.
