Types of Contract Contingencies for Home Buyers
Contract contingencies are a common part of real estate transactions and 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.
Common Contract Contingencies
Buying a house is a multistep process, and many of those 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. Consult with a licensed real estate agent to understand how specific contingencies are handled in your state.
- Appraisal: 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.
- Loan contingency: Further investigations concerning the property or the borrower sometimes result in denail of a mortgage application—even if the buyer has a loan preapproval letter. Some loan contingencies run all the way to closings, and other types might exist for a few weeks.
- Home inspection: Buyers have the right to hire a home inspector and conduct a complete inspection of the home. If buyers issue a request for repair, sellers 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.
- Lead-based paint: Federal laws give all buyers 10 days to inspect for lead-based paint. Many homes built before 1978 contain lead-based paint.
- 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.
- Roof inspection: 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 company that stands to profit by installing a new roof to do an inspection.
- Sewer inspection: 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. It's better to conduct this inspection before you buy a home rather than after.
- 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.
- Early 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.
- 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 stats 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.
- 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 policy. You might discover an easement falls on the property line right where you want to build a fence or put in a pool, and that could be grounds for cancellation of a contract.
- Homeowners association documents: Buyers should obtain for approval a copy of all homeowners association documents, 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.
- 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.