Contingencies Are Back In The Game

It's been a whirlwind few months in the real estate market, but things seem to be returning to some sense of normalcy. Buyers are back to including contingencies in their purchase contracts, and sellers are once again taking them seriously. If you're considering buying or selling a home in the near future, it's important to understand what these contingencies are and how they can affect your deal.

What are contingencies?

In real estate, contingencies are provisions in contracts that state that certain conditions must be fulfilled before both parties are legally obligated to proceed with the transaction. Usually, one or both sides of the transaction (seller or buyer) can walk away and not incur any losses if said contingencies aren't met. Oftentimes, real estate sales contingencies involve inspecting the property and making sure it is worth its asking price. Most real estate transactions are subject to third-party approvals such as appraisals, loan releases, and government approvals which often require a contingency before any sales can be closed. Contingencies help protect all parties involved throughout real estate transactions as they instill confidence during all stages of negotiations. For example, a licensed realtor will usually work with their clients to draft a preliminary contract that includes contingencies so that potential safety concerns can be discussed, estimated costs determined and allocated for future changes to the real property.

Why most buyers waived their contingencies during the housing boom of 2020 and 2021?

The real estate industry experienced an unprecedented surge in demand during 2020 and 2021 due to incredibly low real estate inventory, historically low-interest rates, and rising real estate prices. Buyers had to compete in the market by waving their contingencies. This meant that buyers had to make competitive offers with the assurance that the sellers wouldn’t find any issues through audits of paperwork, home inspections, or appraisals. Risky as it may have been, waiving contingencies put buyers into a stronger bargaining position when they faced multiple bidders on one property since they allowed sellers' expedited closings which limited their overall financial risk. In short, waiving contingencies proved successful for buyers due to decreasing inventory, advantageous interest rates and on-going appreciation of real estate values, ultimately culminating in a housing boom throughout 2020 and 2021.

Contingencies are back!

In real estate, contingencies have been absent for years, given the strong seller's market the real estate industry has been in. However, come the end of 2022, when we can anticipate that the real estate market could start to normalize again, it looks like contingencies will make their comeback – and buyers may once again have a fighting chance if they need to rely on one. A buyer contingency allows consumers to negotiate favorable terms and conditions such as financing or repairs before closing escrow. With real estate suddenly no longer just a seller's market come late 2022, it'll be interesting to see what kinds of changes are needed for real estate contracts to accommodate these potential terms.

Why contingencies are important for both buyers and sellers

When it comes to real estate transactions, both buyers and sellers can rest assured that contingencies are in place to protect their interests. Contingencies help protect all parties involved by providing a foundation for what consequences may arise should certain conditions be met or not met during the negotiation process. For example, a seller may have the option to back out of a sale if certain repairs need to be made; or a buyer can request an inspection period where they can examine the property before committing to purchase. Regardless of who is on either side of the table, these contingency plans offer peace of mind and security for both parties knowing that everyone’s best interests will ultimately be taken care of in real estate transactions.

What are the different types of contingencies and when you should use them?

A real estate contingency is an agreement between a buyer and seller of real estate that states certain conditions must be met in order for the sale to be completed. Contingencies are used to protect both the buyer and seller if unforeseen issues arise during the transaction. Typically, there can be five types of real estate contingencies: home inspection contingencies, finance/mortgage contingencies, appraisal contingencies, title contingencies, and closing date contingencies. A home inspection contingency allows a buyer to inspect the property before further negotiations occur or before purchase contracts are finalized. Finance or mortgage contingencies make sure buyers can close on a house by ensuring they obtain an approved loan with appealing terms. An appraisal contingency requires that a real estate appraiser provide an acceptable value for the property in order for the deal to go through. A title contingency ensures there are no title issues associated with the property that could interfere with ownership rights of either party – this condition must be fulfilled prior to execution of documents in real estate transactions. Lastly, a closing date contingency guarantees that a real estate closing can occur within an agreed upon timeframe; if it cannot happen then either party can terminate the contract without penalty. All these provisions allow any real estate transaction to go as smoothly as possible and provide protection for both parties involved in case something unexpected happens - making them vital components of real estate transactions overall.

Contingencies offer important protections for both buyers and sellers in a real estate transaction. By understanding what contingencies are, when to use them and why they are important, you can help ensure a smooth homebuying or selling experience. Do you have any questions about contingency clauses? Send us a message and we will be happy to help!