The 3 Types of Contingencies You Need to Know About in a Real Estate Contract

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The types of contingencies you see in a real estate contract can be categorized into three groups: property inspection contingencies, appraisal and loan contingencies, and sale of the buyer’s property contingency.

Property inspection contingencies consist of the home inspection, a pool inspection (if needed), and a pest inspection. Typically in a contract, you have a specific due diligence period. In California, you have 17 days to complete your due diligence on the property, which includes doing your inspections. This is a get out of jail free card. If you find anything wrong with the property, and you are not able to negotiate its resolution with the seller, you have the opportunity to get out of the contract.

During the home inspection, the home inspector will thoroughly look at the house and test all of its systems. If anything is found in the home inspection, pool inspection, or pest inspection - which would include termites or other wood-destroying organisms, you have the opportunity to go back to the seller and ask for those items to be repaired. You can also ask for a credit in lieu of repairs or you may negotiate a combination of repairs and credit. Because this is another opportunity to negotiate with the seller, they can agree to do everything, nothing, or some combination.

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The home inspection contingency re-opens negotiations with the seller.

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The next type of contingency are the appraisal and loan contingencies. The lender orders an appraisal on the property to verify that the value of the property is the same or higher than what is in the purchase contract. This is the way they underwrite the property to determine if it’s a good risk to loan the money to the buyer.

They also look at the buyer to determine if the buyer is a good risk. The appraisal and loan contingency period in California contracts typically lasts 21 days, after which a loan commitment is obtained from the lender. That number is negotiable but it will usually take within 21 days to remove that contingency.

When you initially begin your home search, it’s important to have a lender lined up with a pre-approval in place so you can hit the ground running once you are in escrow so you can meet the loan commitment period.

Finally, there is the sale of the buyer’s property contingency. It’s not that common that a seller will take their home off the market for a buyer who has not even listed their house yet if the buyer is going to make the contract contingent upon selling the home. The seller may consider this if the buyer has already listed their home or if the buyer is already in escrow for the sale of their home.

This contingency can allow the seller to ask the buyer to remove the contingency if another buyer comes along. At that point, the buyer would need to move the contingency of selling their home. If they are not confident that their home will sell, they may need to back out of the contract.

If you have any questions, please don’t hesitate to reach out to me. I would be more than happy to help you!