Contract contingencies are common in real estate transactions and are no longer viewed as skeptically as they were in the 1970s when some real estate agents called them "weasel clauses." Contingencies allow prospective homeowners to cancel a contract without penalty get back their earnest money deposits.
Contingencies reduce risks for buyers, and what is allowable varies from state to state. Your state might make a big deal out of a septic inspection, for example, because it could cost many thousands of dollars to replace a faulty septic system. However, many contingencies are common to every state.
- Contract contingencies allow homebuyers to cancel a purchase contract if specific conditions are not met.
- Most states have common contract contingencies, but each state can have some specific to the geography and demographics of the area.
- Contingencies are usually health-related or for expensive repairs that a home could need, such as replacing a roof or the septic tank.
Buying a house is a multistep process. Many of the steps do not take place until after an offer has been accepted. New information or new obstacles can create problems for buyers or sellers, so contingencies typically are a simple matter of ensuring that each step of the process goes as planned or as expected.
These contingencies release buyers and sellers from a contract if there are problems with finances.
Mortgage approval typically includes an appraisal to substantiate the purchase price of the home. A low appraisal could derail a sale by negatively impacting the lender's willingness to approve the desired mortgage amount.
Further investigations concerning the property or the borrower sometimes result in denial of a mortgage application—even if the buyer has a loan preapproval letter. Some loan contingencies run through to closing, and other types might only exist for a few weeks.
You should consult with a licensed real estate agent to understand how specific contingencies are handled in your state.
Contingent on Selling Existing Home
Buyers who have an existing home might want to buy before selling and make the contract contingent on selling their home. Sellers who accept contingent offers like this often give potential buyers a certain number of days to perform. If a buyer cannot perform, sellers retain the option to cancel the contract. Concurrent closings can be tricky—but not impossible—in the right hands.
These common contingencies focus on the condition of the house and property to make sure there are no damages or safety issues that need to be dealt with, as well as investigating the title.
Preliminary Title Report
Title investigations disclose easements, monetary liens of record, including the ability of a seller to transfer clean title to a buyer, and covenants, conditions, and restrictions (CC&R) information. If you can, always order a title insurance policy. For example, you might discover an easement falls on the property line right where you want to build a fence or put in a pool. That could be grounds for the cancelation of the contract.
Title insurance for the lender is part of closing costs. You can also purchase it to protect you from financial loss if there is a claim or defect on the property title.
Buyers have the right to hire a home inspector and conduct a complete inspection of the home. If a buyer issues a request for repair, the seller must receive a copy of the home inspection. In some states, sellers are entitled to a copy of the inspection results, whether a request for repair is issued or not.
Wood-Destroying Pest Inspection
The contract should specify who pays for a pest inspection and whether outbuildings or garages are covered during the inspection. If pests or dry rot conditions are noted, there could be an additional expense to negotiate.
Many home inspectors will not walk on a roof due to the possibility of damage and liability if the roof is damaged, so some buyers hire a separate roofing company to conduct a roof inspection.
Be cautious about hiring a roofing company to do an inspection—they are in the business of replacing roofs. It isn't unheard of for a roofing company to state a roof needs repairs just to get the business.
Sewers can get clogged from tree roots or deteriorate over time. Plumbing companies can insert a camera into a sewer line to check for damage during a sewer inspection. This is an expensive repair, so it's better to have this inspection done before you buy a home rather than after.
Part of inspection contingencies, these inspection focus on common health problems in older homes or specific inspections. These are the most common health-related contingencies.
Radon, Mold, or Asbestos Inspections
Depending on a visual inspection, sometimes home inspectors will call for additional inspections by licensed entities to check for special situations, such as radon gas, mold, or asbestos. Remediation or removal of these defects is generally expensive.
Federal laws give all buyers ten days to inspect for lead-based paint. Many homes built before 1978 contain lead-based paint.
Private Well Inspections
If a home has a private well, buyers may want assurance that the water is potable and meets acceptable health standards. A well inspection also delivers information on how fast the water can be brought to the surface. If a well does not pass inspections, it is not unreasonable to ask a seller to remedy the situation.
You can make contingencies for nearly any concern you have for a property, so check with your agent before the contract is written to see if you can add your concern.
Some states have specific disclosures that must be documented. These contingencies ensure the homebuyer knows everything about the history of the property and any associations they become part of by purchasing it. There might also be some agreements between the buyer and seller that are common in some areas.
Homeowners Association Documents
Buyers should obtain a copy of all homeowners association documents for review, including meeting minutes, if applicable. Pay special attention to the homeowners association (HOA) reserves. A deficiency in the reserves could be a red flag that the HOA is in financial trouble, or the HOA dues might be in line for a steep increase.
Seller Statutory Disclosures
Sellers in California are required to disclose all known material facts, including preparing and delivering a transfer disclosure statement (TDS), natural hazard disclosure statement, special taxes, and statutory supplemental questionnaire. This paperwork is part of a buyer's inspection contingency.
Early/Late Occupancy Agreements
Contracts can be contingent upon a buyer and a seller entering into a written agreement that allows the buyer to rent the property before the close of escrow. This is known as early buyer possession. It also is common in many areas for sellers to stay a few days after closing.