Home Buyers and Sellers Take Note: Contingencies are Back in the Game

As recently as this past summer, the residential real estate market blazed red-hot. The boom made life supremely easy for home sellers, with multiple buyers showering them with bids. At the peak of this super-competitive market, many buyers had to eliminate real estate contingencies from their offers, reducing their negotiating power. They felt this was necessary to get their bids taken seriously. After all, sellers were rejecting offers with contingencies in favor of those with none. 

Times have changed. Not only has the housing market begun to cool off, but winter is also the slowest season for residential real estate sales. As a result, contingencies are back on the table. Not sure what that means for you? Let's break it down.

What are real estate contingencies?

A real estate contingency is a clause included in a home purchase agreement that allows either party to exit the deal if the terms of the clause aren't met.  There are types of real estate contingencies with unique stipulations. Some common ones include:

Appraisal Contingency

This contingency allows the buyer to walk away from the deal if the seller's price exceeds the property's actual appraised value.

Mortgage Contingency

If the buyer can't secure a mortgage for the home after a specified deadline, the seller can halt the transaction and sell to someone else.

Title Contingency

Buyers can use this contingency to ensure that the property has no underlying issues that would interfere with the title transfer.

Homeowner's Insurance Contingency

Under this stipulation, either buyer or the seller may cancel the sale if the buyer can't obtain homeowner's insurance for the property.

Existing Home Sale Contingency

Many homeowners rely on the proceeds from selling their current property to fund the purchase of a new property. This contingency permits them to pull out of the agreement if they can't sell their existing home in time.

Home Inspection Contingency

While this clause requires the buyer to schedule a home inspection within a specific period, buyers should leap to include it. If the seller declines to fix issues uncovered by the inspection, the buyer may exit the deal.

Real Estate Contingencies Can Serve Both Parties

As you can see, some real estate contingencies protect the buyer or seller, while others protect both parties equally. However, this equation became unbalanced during the height of the home-selling boom. Although sellers could insist on any real estate contingencies they liked, buyers felt the need to forego essential protections to get their offers considered.

This is changing as the market slows. Buyers should feel more confident about insisting on certain contingencies that increase their negotiating power and help them make a confident purchase. Meanwhile, sellers can boost their chances of a timely sale in a slower market by accepting contingent offers.