Understanding Contingencies in Real Estate: What Sellers Need to Know
When selling a home, it’s important to understand the role of contingencies in the offer process. Contingencies are conditions written into a buyer’s offer that must be met for the sale to proceed. While contingencies are common and help protect both parties, they can also impact the timing and certainty of your sale.
Here’s a breakdown of what contingencies are, how they work, and what sellers need to know when reviewing offers with contingencies:
What Are Contingencies?
A contingency is a clause in the purchase contract that gives the buyer the right to back out of the deal if certain conditions are not met. These conditions usually relate to the buyer’s ability to secure financing, the results of inspections, or the appraisal value of the property.
For sellers, it’s important to carefully review any contingencies included in an offer, as they can introduce uncertainty into the sale.
Common Types of Contingencies
Here are the most common types of contingencies you may encounter in a real estate transaction:
1. Financing Contingency
A financing contingency protects the buyer by allowing them to cancel the sale if they are unable to secure a mortgage loan. This contingency is often included in offers from buyers who are pre-approved but need to formally apply for a loan after their offer is accepted.
Seller Impact:
While financing contingencies are common, they can delay the closing process. If the buyer fails to secure financing, the sale may fall through, causing you to relist the property.
2. Inspection Contingency
An inspection contingency gives the buyer the right to hire a professional inspector to evaluate the condition of the property. If the inspection uncovers significant issues, the buyer can request repairs, ask for a credit, or back out of the deal entirely.
Seller Impact:
Inspections can bring up unexpected issues, even in homes that appear to be in great condition. To avoid surprises, many sellers choose to conduct a pre-listing inspection so they can address any potential problems before putting the home on the market.
3. Appraisal Contingency
If a buyer is obtaining a mortgage, the lender will typically require an appraisal to ensure the home’s value aligns with the loan amount. An appraisal contingency allows the buyer to back out of the deal if the home appraises for less than the agreed-upon price.
Seller Impact:
If the appraisal comes in lower than expected, the buyer may ask you to lower the price to match the appraised value. You can negotiate, but this can complicate or delay the sale.
4. Sale of Current Home Contingency
In some cases, buyers may need to sell their current home before they can afford to purchase yours. This contingency allows the buyer to cancel the contract if they are unable to sell their home within a specified time period.
Seller Impact:
This contingency can add considerable uncertainty to your sale, as you’re relying on the buyer’s ability to sell their home. It may also delay your closing, so it’s important to weigh the risks carefully when considering offers with this type of contingency.
5. Title Contingency
A title contingency protects the buyer by ensuring that the property has a clear title, free of any legal claims or liens. If issues with the title arise during the sale process, the buyer can withdraw from the deal unless the issues are resolved.
Seller Impact:
Title issues are rare but can be complex to resolve. Working with a title company before listing your home can help prevent delays related to title problems.
How Contingencies Can Affect the Sale
Contingencies offer buyers a level of protection, but they can also introduce uncertainty for sellers. Here are a few ways contingencies can impact the sale:
Delays in Closing: Contingencies often require time to resolve, whether it’s waiting for an inspection, appraisal, or buyer’s financing approval. This can extend the time it takes to close on the property.
Increased Negotiation: Some contingencies, such as inspection results, can lead to requests for repairs, credits, or price reductions. Be prepared for potential back-and-forth negotiations.
Risk of Sale Falling Through: If a buyer can’t meet the conditions of a contingency, they may withdraw from the deal. This can be frustrating for sellers, especially if the home has been on the market for a while.
Managing Contingencies as a Seller
While contingencies are a normal part of many real estate transactions, there are strategies you can use to minimize their impact on your sale:
1. Pre-Listing Inspections
Conducting a pre-listing inspection allows you to identify and address any issues before putting your home on the market. This can give buyers confidence in the condition of the home and reduce the likelihood of an inspection contingency becoming an issue later.
2. Consider the Strength of Offers
When reviewing offers, don’t just focus on the price. Consider the number and type of contingencies, as well as the buyer’s ability to close the deal. A lower offer with fewer contingencies may be more attractive than a higher offer with multiple conditions.
3. Negotiate Contingency Periods
You can negotiate the length of contingency periods to help move the sale along more quickly. For example, you might shorten the time allowed for inspections or appraisals to keep the process moving.
4. Be Prepared to Compromise
In some cases, it may be worth compromising on certain contingencies to keep the deal moving forward. For example, if a buyer requests repairs after an inspection, you can either agree to make the repairs or offer a credit toward the closing costs.
Final Thoughts
Contingencies play an important role in protecting both buyers and sellers, but they can also introduce uncertainty and delay into the home-selling process. As a seller, understanding how contingencies work and how to manage them can help ensure a smoother transaction and reduce the risk of complications.
If you’re preparing to sell your home and need advice on how to handle contingencies in offers, I’m here to help. Feel free to reach out for expert guidance throughout the selling process.
Contact Information
Melody Amirehsani
Realtor, East Bay Area Specialist
Phone: 510-866-6100
Email: homesbymelodya@gmail.com