When you are selling your house, a major milestone is getting an offer. Normally, with that offer comes a contract. For the seller, this can sound wonderful. After all, it’s a contract so it’s firm right? Unfortunately, in-home purchases, even an offer to buy your house is only part of the challenge. Often, home purchase contracts come with language that the buyer uses to protect themselves in case everything isn’t as it seems. Such language is called a contingency. There are some common house buying contingencies.
For the seller, this language amounts to ”I’ll make you an offer, but…”
Just under 2/3 of owner-occupied homes have mortgages. What this means is that when someone is offering to buy your house, this means that they don’t have the money to do so. They can’t just whip out their wallet and pay you. They have to apply for, and be approved for, a mortgage.
This is a whole process where the bank needs to decide that they are a good borrower and that your house is worth funding. If this doesn’t happen, then the deal falls through, and honestly, there isn’t much that the buyer can do if this doesn’t happen. They don’t have the money. So the buyer wants protection if they can’t get approved.
What we will see is many of the other common house buying contingencies fall from this.
Home Inspection Contingency
When you list your house, you are advertising certain things are true. The buyer largely assumes you are telling the truth and makes an offer based on that. However, before they spend hundreds of thousands of dollars, or before the banks lend them that money, they want to verify that your house is what you say it is.
To do this, they hire a home inspector. The Home Inspector goes through the house looking for damage, problems, or other areas that could be a risk to the buyer. If you look hard enough, you’re going to find something.
Often when issues are found, the buyer will go back to the seller and try to get the price adjusted, get the issues fixed, or get some sort of credit. This contingency provides them with the legal flexibility to ask for this and is very common unless you are selling the house as-is where the buyer agrees to buy the house regardless.
Pricing houses is an art and a science. When the buyer makes the offer, they are assuming that the house is priced sell for the market. Often, before closing, there will be an official appraisal of the house where a specialist evaluates the value of the house based on the amenities and conditions of the house and recent sales in the area of similar homes, called ”comps” or comparisons. This process is called an appraisal.
If this process doesn’t evaluate the way the buyer and seller want, the buyer won’t be able to get a mortgage. This leaves them with a few options. The seller may have to lower the price, or the buyer may need to come up with the difference somehow or the deal will fall apart. With an appraisal contingency, when the deal falls apart, the buyer won’t lose any money they’ve put down.
Home Sale Contingency
Houses are expensive. Owning two, doubly so. For this reason, many buyers don’t want to risk being stuck with two houses. So, if they haven’t sold their current house yet they may try to move the risk onto the buyer with something called a home sale contingency. Basically, this says something like ”I will buy your house but only if I can sell mine first.” This is a tough spit for the buyer because they now have the risks of both selling their own house and the buyer being able to sell theirs.
Some buyers will try to demand certain timing on the closing. They may want it in a certain timeframe to avoid being homeless between closings. They may try to put off the closing for a mover or another reason. These are often pretty straightforward and the seller needs to consider the impact on their own situation. These could include things like carrying costs, their own home purchase of other drivers.
The Impact of Common House Buying Contingencies
Every buyer and every offer has their own situation. They’re going to try to negotiate the best deal for their needs. As a seller, you have to think about how that impacts your situation and your risks. Then you can decide whether to take the offer. The offer is about a lot more than just the price and that’s why a cash offer or as-is offer can sometimes mean a lot more.