There is more to a home sale than the actual sale itself. Between listing the property and the actual sale, many things do happen. Two of the important yet often overlooked things occurring between the listing and the sale are contingencies and disclosures. While these two terms sound intimidating, they are easier to understand as we break them down.
Understanding Contingencies and Disclosures
Contingencies are simply provisions in the contract that allow buyers to exit the transaction if these conditions aren’t met.
On the other hand, ‘disclosures’ are an opportunity for the buyer to learn more about the home for sale. A property disclosure is a document from the seller. It contains basic information about the property, plus other information that is relevant to the transaction.
In a real estate transaction, contingencies and disclosures are considered the most powerful ‘protectors’. For the buyers, the contingencies serve as a safeguard against possibly disadvantageous or unsatisfactory transactions.
Use Contingencies to Your Advantage
Contingencies, essentially, are a buyer and seller’s get out of jail free card. Needless to say, make sure you include the standard home sale contingencies while drafting an offer. This is so you can move forward with the deal only when it’s favorable for you.
When the conditions of the contingency aren’t satisfied, you can walk out of the deal without penalties. Plus, you can get your earnest money or deposit back without any issues.
One good example of a contingency is that you’ll only purchase the house once you’ve sold your current home. From a financial standpoint, this makes sense considering you’ll only have the funds for a new home purchase once your old home’s sale is complete.
Kinds of Contingencies in a Home Sale
Standard contingencies found in most contracts include the contingencies you can see below. Among these three are the primary ones: disclosure, inspection, appraisal, and mortgage approval contingencies.
1. Disclosure Contingencies
In a home sale, one of the primary contingencies is your acceptance of the seller’s disclosures. Depending on where you are, sellers may send in the disclosures before or after you send your offer. In any case, after a seller accepts your offer, sellers should be able to send the disclosures for you to approve before you move forward with the transaction.
Once the seller sends the disclosures, review the document properly before you decide to purchase the home. In case the seller fails to send the documents within the specified time frame, you may rescind your offer as you wish.
Or, if there’s anything in the disclosure that doesn’t make sense to you or that you aren’t willing to compromise to, you can still back off from the deal.
In places where disclosures aren’t mandatory, brokers and real estate attorneys require sellers to present disclosure agreements to prevent future disputes.
Do You Still Need Inspections in Case of a ‘Clean’ Disclosure?
As a rule, never forgo inspections, regardless of a clean disclosure. It’s best to go forward with inspections despite having confidence in the seller’s disclosures, as there may be underlying issues in the home that only an inspection can address.
2. Inspection Contingencies
Another core contingency is the inspection contingency, which is exactly as it sounds. With the inspection contingency, whether the buyer moves forward with the sale or not is ‘contingent’ upon the inspection result.
With the inspection contingency, you are authorized to conduct a professional inspection of the house within a specific time frame. After the inspection is done, you have the choice to negotiate repairs with the seller (as needed), move forward with the sale, or back off the deal.
Buyers usually pay for the inspections out of pocket. Inspection costs usually depend on the location and the size of the home. However, in some cases, sellers include inspections in the closing costs. In addition, some buyers successfully negotiate the inclusion of inspection costs when they’re absolutely sure of buying the house.
3. Mortgage Approval Contingencies
Mortgage contingencies, also known as a loan contingencies, is a statement in the contract preventing the sale of the house if the buyer is unable to get mortgage financing for the home.
Normally, sellers require buyers to be pre-approved for a loan before they make an offer for the property. However, the lender still needs to verify certain details concerning the property and the buyer’s personal information before approving the loan. Although most loans will get approved, it is still possible for lenders to reject a loan application.
This is where a loan contingency comes into play. The mortgage contingency allows both the buyer and the seller to back out before a mortgage approval, and without penalties. In addition, this contingency allows the buyers to recover their earnest money in case the sale falls through.
How Long Does the Loan Contingency Period Last?
The contingency period typically lasts for about 30 to 60 days. When the buyer is unable to get financing for the home within the time frame, the seller may cancel the offer and move on to another buyer. When it comes to purchasing a home, the mortgage contingency is crucial. In case your loan application is rejected, the contingency period allows you to look for another lender, at least before the end of the time frame.
Longer contingency periods prevent sellers from backing out on a deal while you’re still waiting for funding for your home. If the period expires and you’re still without a mortgage approval, you can ask the seller for an extension. However, this is entirely the seller’s discretion whether to approve an extension or not.
4. Appraisal Contingencies
Appraisal contingencies state that a house in question must be appraised at a higher price or at least the same as its selling price. This matters because your bank or lender will only grant a loan that’s typically equal to a home’s appraised value. Meaning, if the appraised clause value of a home is less than its selling price, even with a mortgage, you’ll still come up short when buying the home.
For instance, you’re planning to buy a house that’s listed for $400,000 with a $40,000 down payment and $360,000 mortgage. If the home’s appraised value is only $340,000, this means that your lender can only approve a $340,000 mortgage. In order to purchase the home, you will have to come up with the remaining $20,000 on your own.
The appraisal contingency allows you to walk away from a deal and get your deposit back when the seller refuses to make up the difference.
However, when the home gets a low appraisal and both parties refuse to back out, you may petition the bank/lender for a re-appraisal, if you believe the home is actually worth more.
5. Home Sale Contingencies
With home sale contingencies in place, the transaction will depend on the sale of a buyer’s existing home. If the buyer sells his former home within the given period, the home sale will proceed. If not, he can freely back out of the contract without penalties.
A sale and settlement contingency applies to buyers who have not yet received any offers for their current property. This contingency allows sellers to market the prospect home to other potential buyers.
If the seller receives another offer, the buyer has the opportunity to remove the sale and settlement contingency to ‘reserve’ the home. If the buyer disagrees to remove the contingency within the given period, the seller cancels their contract and moves forward with the new buyer.
With a settlement contingency, the buyer has already a settlement (or closing) date in place for his property. The settlement contingency allows the buyer to walk away from the deal without penalties in case the sale of his former home falls through.
- Insurance Approval Contingency. With an insurance contingency, the home sale is dependent (contingent) upon a home insurance application. Not all insurance contingencies are requested by the buyer. In some cases, it may be required by the seller or even the mortgage lender.
- Satisfactory Walk-through Contingency. This means that the buyer will only move forward with the deal, provided a satisfactory walkthrough of the property.
Ask your real estate agent and/or attorney to help draft your offer with good contingencies in place, so contingencies will work to your advantage. Apart from the standard contingencies prescribed by your state laws, you may also add in a few more that you think are applicable.
Uncovering ‘Secrets’ Through Disclosures
The law requires sellers to be transparent with the properties, defects and all. Disclosures attract good-fit buyers willing to go forward with the sale despite flaws in the home. If you’re a buyer, it’s your chance to walk away early from the property in question, before you send your offer to the seller.
What Can Buyers Expect From Property Disclosures?
Disclosures may vary from one state to another. In a disclosure, sellers indicate damages, environmental hazards (flooding, hurricane risks, and others) and issues with the homeowners’ association (if there are any).
Disclosures cover physical and structural attributes of the home that may be impossible to figure out without a thorough inspection. Or sans the document itself. Buyers can find out plenty from the disclosure document, from ventilation, plumbing or heating issues, to unsanctioned home improvements
Ask for a Property Disclosure Every Time
As a buyer, disclosures give you a sense of what to expect from a house you’re eyeing before you’re able to make an offer or move forward in a real estate transaction.
There are markets that require the sellers to give disclosures before the buyer makes an offer. In this case, Forbes advises buyers to ask for a seller’s property disclosure each time they look into a potential home.
However, in some markets, the law requires sellers to hand the disclosures only when the seller has accepted the offer. If this is the case, you can still back out in case you find the seller’s disclosures unsatisfactory.
It’s necessary to take disclosures seriously. As a buyer, disclosures provide a chance to unearth potential problems (whether structural or legal) that an open house easily conceals. After disclosures, it’s up to you to decide to push through with the transaction given the present issues.
After all, there is no shame in moving on to another home, since you’re the one who’s going to live with your purchase decision.
Mind Your Contingencies, Check Disclosures
Contingencies are part of a buyer’s due diligence, as well as checking disclosures. When buying a home, these things are necessary, considering a home purchase decision has lifelong consequences.
Ask help from your real estate agent and/or attorney in drafting contingencies that work well for you. Having the right contingencies in place will allow you to walk away from the deal without penalties.
Examine disclosures carefully and make sure that you understand what they mean for you as a buyer. In some cases sellers may not be willing to disclose details of the home. For this, it’s best to hire an inspector to check the integrity of a home.
Nevertheless, it’s also good to remember that there isn’t a perfect house. Consider the non-negotiables and what you really want and be willing to compromise for a bit, especially for minor issues that are inexpensive to solve.