A real estate contingency is a provision that something must be overcome or approved to consummate a transaction. In other words, it’s a condition, such as “I will buy this house IF (fill in the blank)”.
Silicon Valley real estate consumers are well aware that home buyers normally have a few contingencies during escrow. The major ones are for property condition or inspection and loan or finance (to include appraisal). But there are others too, such as approving the preliminary title report, obtaining and accepting disclosures etc. (On rare occasions, such as some tenant occupied properties, the buyer may have to make an offer first and then, after it’s accepted, view the home or apartment building. In that case it’s “write offer subject to inspection” – a contingency that you’ll accept it after you get into escrow! This is how apartment buildings and some multi-family dwellings are sold.)
What about seller contingencies?
Sellers, too, may be able to back out of the contract if certain conditions are not met. The two we see most common are these:
- In the case of a short sale, the sellers have a contingency for bank approval and for their acceptance of the bank’s terms. If the bank doesn’t approve the short payoff, the seller does not have to sell the house to the buyer.
- Sometimes sellers only want to sell their home if they can find another one which they wish to purchase. This can be a contingency also: “sale subject to sellers’ finding a replacement property within X number of days“.
Some homes are part of a co-op (cooperative) and in a few areas around the country, I think mainly in New York City, a board must approve whomever wants to purchase the home or unit. In those cases, there would be a seller contingency for board approval. I have never run into it in the San Jose, Los Gatos, or Saratoga area but it is possible that you could see it somewhere in California.
How does a seller’s contingency impact value and desirability?
Seller contingencies usually make it difficult to attract buyers since there is a giant unknown in terms of the ability to close escrow and it’s not in the buyer’s control to fix it. With short sales, that contingency must be in place for the seller, but not so for the “replacement property” clause. When sellers invoke that contingency (which must be listed in the MLS), it will usually cut down on showings, offers, and ultimately the probable buyer’s value for the home – so normally this is not advisable.