Your standard home purchase contract will include contingencies, which are conditions that must be met before (i.e. are contingent upon) finalizing a home sale.
The majority of contingencies will come from you, the buyer, but they can protect both the buyer and seller. Contingencies provide an out if one party can’t meet the conditions by the purchase closing date.
During escrow, various contingencies will have deadlines attached to them. Your real estate agent as well as the sellers’ agent will keep all parties updated when each contingency has been met.
Here are some of the most important contingencies to include in your home purchase contract.
Home inspection
A home inspection is the most important contingency to include in your contract. An independent home inspector will examine the home for electrical, plumbing, structural, and other potential issues.
If the inspection does turn up problems, you have the right to request repairs, lower the purchase price, or, if a major issue turns up, back out of the deal.
Appraisal
Your lender will likely send an appraiser to determine the fair market value of the home before approving your loan. If the appraisal comes in lower than your offer amount, the lender may not approve the loan. If that happens, this contingency allows you to back out of the deal.
Another option—if the appraised value is somewhat close to your offer—is to renegotiate the price.
Financing
A financing contingency means that if you fail to secure a loan you can get out of the deal. Without this contingency, you could, at best, lose your good faith deposit. At worst, you could face financial catastrophe if you’re on the hook for hundreds of thousands of dollars without financing.
Insurance
In high-risk disaster locations, home buyers are increasingly being denied home insurance. That’s why many buyers include an insurance contingency, which means that you agree to buy the home only if you are able to secure a home insurance policy.
You can also include a title insurance contingency, which comes in handy if it turns out the sellers had any disputes over ownership of the home. Title insurance helps pay for legal expenses incurred when clearing up such issues.
Well water and septic system inspections
The quality of your water can affect your health, and septic systems can cost tens of thousands of dollars to fix. So it’s important to make sure both are in good shape before agreeing to buy a home. These inspections are usually separate from the general home inspection.
Pests and rodents
The presence of termites, roaches, and other bugs is usually not included in your general home inspection. Mice, rats, raccoons, and other animal intrusions are also typically not included. So if you’re concerned about potential infestation, be sure to add a separate inspection contingency.
Sellers’ contingencies
Most contingencies are written into the contract by buyers. But sellers also sometimes include contingencies. Sellers’ contingencies might state that the sale is contingent upon them finding another home to buy. Or it could be a need to rent back the home from you, the buyer, for a certain amount of time until they can find another place to live or have time to move out.
On the flip side, you can also make the sale contingent upon the sale of the home you’re currently living in.
When you have your heart set on buying a particular home, it can be tempting to make yourself as attractive a buyer as possible and remove contingencies. A sellers’ market makes this tempting, but they can be extremely important for protecting what may be the largest purchase of your life.
Sources: Realtor.com, Nolo, Home Inspection Insider
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