A contingency is a possible future event or circumstance that cannot be predicted with certainty. In real estate, contingencies are conditions of the purchase agreement which exist to protect the buyer — and on occasion, the seller — until that condition is certain.
There are three common contingencies in real estate.
- Due diligence. The period where you hire a licensed home inspector to discover any significant problems or defects to the home.
- Appraisal contingency. A licensed appraiser provides the property’s value for the lender to determine the amount they’re willing to lend.
- Loan contingency. The time it takes for the lender to underwrite and approve the loan entirely.
Aside from the three common contingencies, lesser-known contingencies could be equally as important.
This article explains all of the contingencies available to protect your earnest money deposit when buying a home.
- Due diligence
- Appraisal contingency
- Loan contingency
- Preliminary title
- HOA resale package
- Contingent upon sale
Please note: All regulations and laws cited pertain to Nevada state law and contracts by the Greater Las Vegas Association of REALTORS®. Please check with a specialist in your area prior to acting on information we share.
Contingency days: 8-12 calendar days
The due diligence period is the buyer’s opportunity to thoroughly vet the home after the contract is accepted. The typical time for the due diligence period is the first 8 to 12 calendar days, with day one starting the day after offer acceptance.
A buyer should have received the Seller’s Real Property Disclosure by this time—a mandatory form that requires sellers to disclose any known or previous defects that may affect the value or useability of the home by law.
The due diligence period is when buyers hire a licensed inspector. Inspectors perform a non-invasive and non-destructive physical inspection of the home. Their job is to find any mechanical issues that may impact its usability or suitability.
The inspector prepares a detailed report to be reviewed by the buyer. Details of all features inspected will be noted with any issues highlighted.
Once an inspection report is received, the buyer will request from the seller to fix any significant repairs or give a credit at closing in lieu of. Sellers may accept, decline, or negotiate. The time spent negotiating is also included in your due diligence period. This is an important reason to schedule your inspection quickly because you may need time for a slow seller’s response.
If the inspector uncovers a significant issue with the home, the buyer has the right to cancel. In fact, during the due diligence period, a buyer can cancel for any reason and receive their earnest money deposit back.
Although this should be done in advance, the due diligence period is also an opportunity to ensure the surrounding area is also to your satisfaction. This could include flood zones, airport noise, noxious fumes or odors, environmental substances or hazards, zoning, or being close to a freeway or railroad. You can choose to do a pool/spa inspection, soil inspection, septic pump & well (if applicable), termite & pest, roof, or an energy audit.
A licensed inspector will often be a great start. If they uncover more potential issues, you can hire the roofer, pool technician, or specialist in that area to inspect and advise.
When requesting repairs, you should focus on mechanical and structural issues that materially affect the value or use of the property. Cosmetic matters should not be addressed through a repair request; they should be considered in your offer price.
One to three days before closing, the buyer completes a final walk-through of the home. The walk-through is to verify any repairs agreed upon were completed correctly.
Contingency days: 15-21 calendar days
When financing a home purchase, your lender will require an appraisal to be completed on the home. Appraisals protect the mortgage company from lending more than the home’s value.
Licensed appraisers use public data from the assessors and Multiple Listing Service (MLS) to compare recently closed sales in the area and determine the property’s value.
Appraisers visit the property to note the upgrades and take measurements to verify the square footage. The appraiser then adjusts the comparable sales by adding or subtracting value for the differences in square footage, bedrooms, garage spaces, lot size, upgrades, views, location, etc.
Typically, appraisers use 3-5 sales within one mile of the subject property sold within the last six months.
An appraisal is an educated opinion. One appraiser can consider a pool’s value to be $50,000, while the next values a pool at $75,000.
For example, In 2018, I listed a home for sale at $300,000. There were plenty of comparables to support the value.
It first appraised for $285,000 and, when we couldn’t come to terms and re-listed, was appraised again for $305,000. Just 12 days later.
If an appraisal comes back higher than the purchase price, you already have equity! If it doesn’t appraise at the contract price, you must go back to the negotiating table. When the seller is unwilling to negotiate, you have the right to cancel or pay the difference at closing.
Just like due diligence, time negotiating is also included. It’s important for your lender to order the appraisal as soon as possible and for you to pay the invoice when requested.
Frequently asked appraisal questions:
Who pays for the appraisal? Typically, the buyer pays for the appraiser. It’s an upfront fee and is required before the appraiser completes the appraisal.
How can we trust the appraiser is working for us? After widespread fraud in the early 2000s, most lenders began using appraisal management companies to request an appraiser. Often, the bid goes out to all appraisers and whoever accepts the terms first gets the job.
Typically, appraisers don’t communicate with either party throughout the process unless they need to. Also, appraisers take their job very seriously. Appraising is the only field in real estate with a two-year apprenticeship, so they’ve invested a lot of time into their trade.
If it appraises higher, will the seller know? The seller has no right to the appraisal unless it comes in below the offer price and you request a price reduction.
Can we request another appraisal if it’s low? Most likely not. If your agent believes there are better comparables the appraiser should have used, they could send them for their consideration. Usually, it’s not the chosen comps; it’s the adjustments to them.
FHA and VA appraisals may remain in the system for some time and can be referenced again. If you are obtaining a conventional loan, ask your lender, but you will likely be through your appraisal contingency unless you can get a rush order.
Contingency days: 21-25 calendar days
It’s imperative you quickly return all the information your lender needs promptly.
Your lender is just the front line of a more robust lending operation at most mortgage companies and banks. Their job is to initially approve you, communicate through the process, collect information, package it into a detailed file, then submit it to underwriting in hopes the underwriter doesn’t ask for more.
An underwriter’s job is to try to get to NO. Your finances and creditworthiness need to persuade the underwriter to say YES.
The success of a lending company is tied to how well the underwriter approves good loans and avoids the risky ones. Underwriters make the ultimate decision on if your loan will be approved.
You should have final approval and a ‘clear to close’ loan if everyone is working efficiently within 21 days. Larger banking institutions like Wells Fargo, Chase Bank, and BofA are known to take longer.
The communication between an agent and the lender is essential, so the contingency dates on the contract match the lender’s expected timeframes. If you don’t have final approval by the end of your loan contingency and the loan gets denied, you may lose your earnest deposit.
Once your loan receives final approval, a closing disclosure (CD) will be sent to you. The CD is a five-page form that, by law, must provide you with the loan terms, projected payments, total fees, and other costs. This form must be sent to you at least three business days before closing. If your loan takes 28 days and you have a 30-day escrow period, you won’t be able to close in time.
When buyers can’t close in time, they have to ask the seller for an extension. The seller can cancel the transaction and keep your earnest deposit, agree to extend it, or negotiate terms. New terms could be a daily fee, removing any previously approved credit, or more.
Contingency days: 5 business days from receipt
Congratulations! Your offer is accepted.
Escrow will be opened at your chosen title company within 24 hours. The escrow officers and title companies play an important role in the process. Including:
- Provide documentation showing the title on the home is clear and insurable.
- Be a neutral party that helps each side through the transaction by following the terms of the purchase agreement.
- Handle the collection and disbursement of funds, like the earnest deposit, down payment and loan.
- Sign loan documents and deeds.
- Send to county to officially record.
Within 10 business days of offer acceptance, the title company will deliver a preliminary title report. In this report, you’ll see the legal description of the property, any liens or assessments, easements, encumbrances, discrepancies, boundary line conflicts, unpatented mining claims, and water rights, to name a few.
Once delivered, buyers have 5 business days to review and cancel if there’s an issue with the title. If an easement allows the neighbor to drive through your property to theirs, you may choose to cancel.
Maybe a neighbor built a pool house over the property line. Or, a construction lien shows up that the seller isn’t able to pay off. If there is a cloud on title the escrow officer should bring it to your attention.
Title insurance is a protection against a break in chain of title, or a claim on title that was missed or not filed prior to closing.
In one scenario, a friend purchased a short sale property and years later sold the home private party to a family member. A debt collector, with a Mercedes sized debt, tried to collect from the family member for the short sellers debt.
If the family member chose to purchase title insurance, it would have protected them from having to go to court. Thankfully, the court saw their side and dismissed the debt collectors claim.
Title insurance helps to protect you against claims after closing.
HOA Resale Package
Contingency days: 5 calendar days from receipt
With over 351,000 Homeowners’ Associations in the US, you’re likely one of the 58% who live in one. If so, your home purchase or sale will involve an HOA resale package.
The HOA Resale Package is a detailed breakdown of the HOA communities bylaws, guidelines, and budget for all homeowners. From street parking and the number of plants in the front yard to their annual budget for maintenance, this provides buyers with what to expect while living in the community.
It’s so important it was made a law. In Nevada, the law states, “Seller shall provide the CIC documents at the seller’s expense as required by NRS 116.4109.”
To further the law, the resale package must be requested within two business days of acceptance of an offer and delivered to the buyer within one business day of receipt. If a buyer does not receive the resale package within fifteen calendar days of acceptance, the purchase agreement can be canceled in full by the buyer without penalty.
Once a buyer receives the resale package, you have five calendar days to review and accept it. If any rules or regulations are not acceptable, the purchase agreement may be canceled without penalty.
Contingent upon sale.
Contingency days: Negotiable
While not in every transaction, roughly 40% of buyers need the equity from their current property for the downpayment of their next home. Traditionally, and still today for those who live in areas without alternatives, like First&Sold, there were three ways to use your equity to purchase your next home.
- Buy your next home with a smaller down payment, then carry two mortgages while selling the old house. Then, refinance and put more money down to decrease your loan amount when the old house is sold.
- Sell your old home first, lease it back from the new owner, then search for and buy your next home.
- Make an offer “contingent upon sale,” which means you’re under contract, and the seller understands and agrees you need to sell your old home to buy theirs.
Contingent upon sale is the least favorite offer for sellers. It’s also easily overlooked when competing with similar offers without the contingency. This is due to the added layer of risk that the transaction may fall out of contract.
As a seller, you’re already trusting one party in the process, and now you’re forced to trust the buyer of the contingent home too.
What contingencies are commonly waved?
As you learned, a non-contingent offer is never completely non-contingent. If the home is in an HOA community, it’s contingent by law.
In a competitive seller’s market, buyers are waiving their appraisal and loan contingencies while still keeping their due diligence.
For example, if you offered $500,000 and the home appraises for $475,000, you have to pay the difference of $25,000. If that extra $25,000 will negatively affect the approval of your loan, you are not protected by a loan contingency either.
At this point, you’re likely through your due diligence, preliminary title, and HOA contingencies too. You might lose your $5,000 earnest deposit unless the seller missed any critical time frame in the contract.
What are common contingencies in real estate you should know?
The due diligence, appraisal, and loan contingency are the three common contingencies in real estate. Other contingencies that may protect your earnest deposit are the HOA resale package, preliminary title, and contingent upon sale addendum.
Now that you understand all of the contingencies available to protect your earnest deposit, you can make the difficult decision to waive contingencies for a more competitive offer.
Sometimes you need to take risks to win the home you desire. Always understand the risks and have the financial strength to support them.
If you decide to waive your due diligence period, still hire a licensed inspector. Sometimes losing your earnest deposit is not the worst-case scenario.
Happy home buying!