What are contingencies?

Contingencies have not been used as much in recent years due to our overheated Silicon Valley real estate market, but with some cooling in the market, we are beginning to see them make a return, so this is a good time to provide a refresher on the subject.

Today we’ll go over what a contingency is, who gets contingencies, what a contingent offer means, and other considerations on how contingencies work overall. This is just an intro article for the basic concepts, but we’ll provide links to more in depth info elsewhere.

In real estate sales, contingencies can be a permitted way that one party may back out of the purchase agreement. Of course, those contingencies must have been written into the purchase agreement and agreed to by all parties upfront, when the offer was ratified.

If the offer is accepted with a contingency, it must be satisfied and removed within the set number of days for that contingency, such as 7 or 10 days. If the loan is not approved in that time frame, the buyers may request an extension to try to find other financing or fix whatever is amiss with the current lender, or they may just back out (and normally they would get their full deposit returned to them unless they somehow billed something, like an inspection, to escrow, in which case the bill would be paid and then they’d get the balance back).

Be aware that the number of days requested will be less enthusiastically viewed if they are long, or if they cover information that has already been provided upfront. For example, if buyers got the HOA docs before they wrote the offer, sellers won’t love seeing a contingency to review the HOA documents in escrow.

Long contingency timeframes may hurt the buyers’ odds of offer acceptance, particularly in multiple offer situations, where often completely non-contingent offers may be the norm in our market.

Buyers doing their due diligence makes sense. Among the worst offers for sellers to get are blind offers (sight unseen, sellers’ disclosures often not reviewed) with contingencies. Home buyers who come prepared and taking the offer process seriously will be appreciated.

Who gets contingencies, and why?

Most of the time, if there are any contingencies, they are the buyer’s. These are the most common contingencies in Silicon Valley:

Loan (aka mortgage or finance contingency)
Appraisal at or over the sale price or another agreed upon number.
The buyer accepting info obtained in escrow, such as
- Inspections (home, roof, pest, pool, lead or asbestos testing, HVAC, etc.)
- Property Condition (could be off site, such as neighborhood issues, school quality, and more)
- Title Documents
- Property Disclosures, many provided by the seller, others including the Natural and Environmental Hazards Report
- Insurability or affordability of insuring the property (big issue right now)
An uncommon buyer contingency is one for the sale of their current home. In other words, the purchase is subject to the sale of their owned home (and that could be a house or other home that’s not currently on the market, or it could be on the market, or under contract, or perhaps just days before closing escrow).
- Acceptance of info in the Homeowner Association Documents (get & review documents, including the HOA’s reserve account)
Rarely, there could be seller contingencies, including a contingency for locating a replacement property or a contingency in a short sale for the seller’s lender to agree to a short payoff. (Short sales are few these days.)

Related: Please also see our article Real Estate Contract Decisions

Contingencies are a big deal, second only to price in importance in the contract, so naturally they are referenced both in the purchase agreement AND there’s a special real estate form specifically to clarify which contingencies are requested and which ones waived, if any.

What are contingent offers?

Contingent offers come from home buyers who want to buy another home subject to the sale of their current one.

For those who opt to write a contingent offer, understand that there are really four levels to it:

1 – The buyers’ current home is not yet on the market.

2 – The property is on the market but it has not get received an acceptable offer yet.

3 – It’s under contract or in escrow, but the buyers have not yet removed their contingencies (so the sale may fall through)

4 – The home is in escrow and the buyers have removed their contingencies, but the sale has not yet closed.

Sellers do not love getting offers with contingencies to sell another piece of real estate, but the 4th scenario is not too off-putting, while the first one is extremely risky feeling to the sellers. It can also depend on where the property is, why it looks well positioned to sell, what the market activity is like for that home and location, and more.

The bottom line is that major parts of a real estate purchase contract are the price and terms, and some of the most scrutinized and important terms are contingencies.

How much time do you need for inspections when buying a home?

Acquiring your loan (in-depth article on our popehandy.com site)

What are contingencies?