In a purchase offer, a contingency allows the buyer an “if/then” opportunity.
For example, “If the house doesn’t appraise for my offer price, then I don’t have to buy it.” Or, “If my home inspector doesn’t like what they find on my inspection, then I don’t have to buy the house.”
Typical contingencies include appraisal, loan approval, insurance availability, property condition, homeowners association document review and the sale of the buyer’s current home. Contingencies protect buyers. They are common in most other parts of the country – just not in the Bay Area.
Why not?
In tight, competitive market conditions, transactions move quickly, most occurring within the first week and involving offers from multiple buyers. A contingency period slows the process and allows the buyer a way to back out of a transaction. If that occurs, a seller would lose a great deal of the initial momentum of a multiple-offer situation and might end up having to accept a lower offer price.
With multiple offers, the seller has a huge incentive to accept not only the highest offer, but also the offer with the fewest contingencies.
Most offers these days have no contingencies. That means even if the house doesn’t appraise or if you can’t get your loan, etc., the buyers are still obligated to purchase the house or risk losing some or all of their initial 3% deposit (sometimes referred to as “earnest money”).
There is an old real estate joke: “I’m so happy! I just bought a great lot! … Oh, by the way, there was a house on it.”
Q: Are there ever seller contingencies?
A: Sellers might have a contingency that they would need to find a replacement property within a certain period of time. If they are not able to do so, they could back out of the contract.
Q: If the buyers try to back out of a transaction and there are no contingencies, what happens?
A: At a high level, the buyers’ 3% deposit is at risk. If sellers can prove that they have been damaged (lost money), they can go after the buyers’ 3% deposit. In practice, that deposit amount is often negotiated down.
Q: How often do the sellers get to keep the deposit if the buyers default?
A: Not as often as you might think. Usually the sellers just sell the house to buyer No. 2 and move on.
Q: When buyers choose not to have contingencies, isn’t that dangerous?
A: Yes and no. Most sellers in our area prepare complete disclosure packages that show property defects. I see the biggest issues on appraisals. The lender will loan on a property based on the appraised value from a certified appraiser. If that amount is lower than the purchase price, a noncontingent buyer will most likely need to make up most of the shortfall in extra cash.
Q: Are most offers these days noncontingent?
A: Yes, the vast majority of buyers understand that sellers will be looking for the offer with the fewest contingencies (zero).
Owen Halliday is a realtor who manages the Sereno office in Los Altos. Call (650) 492-0062 or email [email protected].
