Financing Contingency

A financing contingency allows the buyer a certain period of time to apply for and obtain financing. This protects the buyer in the event he/she is unable to secure financing from a mortgage broker, bank or other lending institution, and allows the buyer to back out of the transaction and request for the earnest money deposit to be refunded.

A financial contingency will have a specified number of days that the buyer has to obtain financing and the buyer has until this date to terminate the contract or request an extension that must be agreed to in writing by the seller), otherwise, the buyer automatically waives the contingency and becomes obligated to purchase the property – even if a loan is not secured.

Appraisal Contingency

An appraisal contingency protects the buyer and is used to ensure the property is valued at a specified amount (purchase price). If the property does not appraise for at least the purchase price amount, the contract can be terminated by the buyer and the earnest money deposit, in many cases, is refunded to the buyer.

An appraisal contingency may include terms that permit the buyer to proceed with the purchase even if the appraised value is below the purchase price and the seller could lower the price to the appraisal amount. The contingency specifies a release date, on or before which the buyer must notify the seller of any issues with the appraisal; otherwise, the contingency will be deemed satisfied, and the buyer will not be able to back out of the transaction.

Purchase Contingent on Sale of Buyer's Property

Sellers will want to know the status of the buyer's sale transaction progress. The status might make a difference as to whether your offer is accepted. Obviously, if your home is not yet on the market, the seller might not consider your offer at all because it will give the impression that you are not serious about selling or buying.

One of these situations should apply and be checked:

The buyer's home is not yet listed for sale: Please, don't ever check this box because it can hurt your acceptance chances. If your home is not yet on the market, you are not a buyer or a seller. You are somebody who is thinking about it.

The buyer's home is for sale: You will name the brokerage that has listed your home, the name of the MLS (Multiple Listing Service) in which it is listed and identify the MLS number. If you are planning to sell your home without representation, the listing agent representing the seller will likely advise the seller to reject your offer. This may seem unreasonable and possibly sound unfair, but if you plan to represent yourself on the sale of your home, you may not appear credible to the listing agent nor to the seller.

The buyer's home is in escrow: Your home is already in escrow. The seller will want to know the name of the Escrow Company, the Escrow Number and when escrow is scheduled to close.

If Buyer's Property Does Not Sell

The date of closing on your property is vital. If you enter a date because it is in escrow when you write your offer to purchase, the seller will expect you to close by that date.

You have the option to specify a date on the contingency agreement that is different than the scheduled date of closing, which is recommended, especially if your property is not yet in escrow.

If your present home does not sell by the date you specify, the seller then has the right to issue a “Notice to buyer to perform” demanding that you close. If you cannot close, the seller has the right to cancel your agreement to purchase.

Right of First Refusal

Part of the negotiation process for a contingent contract is whether the seller can cancel your purchase agreement if the seller receives another offer. Typically, the seller retains the right to continue marketing the property regardless of the option agreed upon.

Removal of sale contingency: This option allows the seller to cancel your purchase agreement if the seller receives another offer. Should the seller receive another offer, this provision lets the seller give you, by default, 72 hours to remove your contingency. This does not mean you need to sell, but your agreement would no longer be contingent on the sale. Removing your contingency means you would need to find the funds to close elsewhere such as by obtaining a bridge loan or liquidating assets.

Back-up offers only: This option does not allow the seller to cancel your purchase agreement. The seller is legally bound to sell to you, providing you eventually sell your home within the time specified, but the seller can accept offers as a back-up in case your transaction falls apart. Very few sellers who are represented by an agent would be advised by their agent to accept this option.

Inspection Contingency

An inspection contingency (also called a “due diligence contingency”) gives the buyer the right to have the home inspected within a specified time period, such as 5-10 days. It protects the buyer, who can cancel the contract or negotiate repairs based on the findings of a professional home inspector. An inspector examines the property’s interior and exterior, including the condition of electrical, finish, plumbing, structural, and ventilation elements. The inspector furnishes a report to the buyer detailing any issues discovered during the inspection. 

Depending on the exact terms of the inspection contingency, the buyer can:

• Approve the report and the transaction moves forward
• Disapprove the report and back out of the transaction (and have his/her earnest money deposit returned)
• Request time for further inspections if something needs further evaluation
• Request repairs or concession (if the seller agrees, the transaction moves forward; if the seller refuses, the buyer can back out of the transaction and have his/her earnest money deposit returned)

A cost of repair contingency is sometimes included in addition to the inspection contingency. This specifies a maximum dollar amount for necessary repairs. If the inspection indicates that repairs will cost more than this dollar amount, the buyer can elect to terminate the contract.