The purchase of a home has always been the largest single investment that most people will make in their lifetime and that remains true today. This is easily illustrated by the fact that the current median price of single family homes in the United States is now almost a quarter-million dollars. The sheer cost of purchasing a home today makes it more important than ever for homebuyers to pay extra attention to the purchase process. This can be accomplished by effectively using contingency clauses to protect the buyer's financial interests whenever making any offer to purchase real estate.
How do contingency clauses provide protection for the buyer?
Real estate purchase offers that are properly signed by all parties are considered to be legal, binding contracts in the eyes of the law. Buyers who sign a purchase offer without making the transaction contingent on certain conditions and actions can find themselves legally bound to complete the purchase even if serious issues are discovered.
A good example of how problematic this can be is when a Homewood home fails to appraise for the amount of the home loan the buyer is applying for and their mortgage approval is denied. Without the protection offered by a contingency on appraisal or final mortgage loan approval, the buyers could be sued for "specific performance", or failure to complete the transaction, even though their lender did not grant the mortgage and they lack the financial resources to do so.
Are contingency clauses only for the protection of the buyer?
A common misconception about the use of contingency clauses is that they are solely for the benefit of the buyer, but this is false. In fact, buyers who make their offer with appropriate contingency clauses are protecting their interests and those of the seller. This is because a contingency clause will include performance dates and time limits that will help assure the seller that they will not be forced to lose valuable market time if the buyers can not perform their duties under the purchase contract.
Properly worded contingency clauses should always include a realistic timeframe during which the desired action must take place in order for the contingency to apply. For example, buyers should always use an inspection contingency clause to give them ample time to complete thorough inspections of any aspect of the property they wish while still being within acceptable limits based on averages for their market.
Common inspections that most buyers cover with an inspection contingency clause include:
- a third-party home inspection to look for defects, repair, and condition issues of the home
- a separate roof inspections
- foundation inspections
- termite and pest inspections
- septic and water well inspection and water tests
- lead-based paint assessments
- asbestos inspections
- in-depth systems inspections, such as plumbing, HVAC, and electrical
A properly worded inspection contingency clause will detail the inspections the buyers want to perform and set time limits that state the date by which the inspection must be completed.
In addition, there will also be a set period of hours or day during which the buyers must approach the seller to negotiate any issues they want addressed. Buyers who either fail to have inspections performed during the specified time frame or neglect to take steps to negotiate any issues found with the stated time frame are effectively waiving the contingency and can then be required to move forward and complete the purchase.
Is it important to make an offer contingent upon appraisal when no loan is involved?
If the home is to be purchased for cash, with no mortgage involved, an appraisal contingent should still be used by buyers. This will assure buyers that the home they are purchasing does have a market value that aligns with the price that the seller is asking for the home and that they are getting a good value on the transaction.
How does a contingency clause on the sale of another home work?
Buyers who must sell their current home in order to make another home purchase need to fully utilize a contingency clause to give them protection in the event that the home is not able to be sold in the time frame specified in the purchase contract. When wording this type of contingency, it is important to specify that their offer is contingent upon the successful closing of the prior home.
Then if the home does not close for any reason, the buyer will be able to legally walk away from the purchase contract they have made without being financially liable to complete the purchase. For more information about using purchase offer contingencies to protect your interest, prospective buyers should carefully discuss their financial situation and home purchasing goals with their real estate professional before making any purchase offer.