That hint of angst, uncertainty, and hesitation a homebuyer might feel before signing an offer on a new home is common. But don’t fret. Even with a ratified contract, a buyer still may legitimately get out of a contract through a number of release points—or contingencies—that protect buyers and sellers from surprises and unforeseen problems. They actually help turn the path to closing into a digestible process where confidence builds as the closing date approaches.
This doesn’t mean getting out on a contract won’t cost the buyer a penny, but if there’s a legitimate reason and the buyer follows the rules, a contingency does exactly what it’s designed to do.
Now, a contract can have pretty much any contingency; just remember that ridiculous requests make an offer unappealing.
Still, if you’re familiar with some of the most common contingencies you can exercise, it should give you peace of mind when signing on the dotted line. Let’s take a look at them …
Condo or Association Documents: If a property is a condo or part of a homeowners association, buyers can seek release from the contact after reviewing the resale disclosure package from the association. Often referred to as “condo docs,” these contain financial information about the association as well as any rules that apply to owners in a given community. By law, the seller must provide these documents to the buyer, who then has three days to review them. If within that review period the buyer wishes to withdraw from the contract, he or she may do so without penalty and for any reason. The buyer need not specify why they are exercising this contingency, and may use this release without spending any money at this point, assuming they get the documents before paying for a home inspection. Remember, however, not all homes are condos or belong to a homeowner association, so not all contracts carry this contingency.
Home Inspection: Most home purchase contracts are contingent on an inspection. To exercise this contingency, buyers must pay for a professional inspection, which usually costs several hundred dollars. As long as the inspection is completed within the time frame set in the contract (usually within seven to 10 days of ratification) and the buyer/buyer’s agent delivers the inspection report to the seller/seller’s agent, a buyer may then get out the contract for any reason. The buyer does not need to specify why he or she wants out and may exercise this contingency even if there are no defects.
Financing: Unless the homebuyer is paying cash for the entire purchase price of a home, the bank will require a financing contingency. Standard in most contracts, it basically says the purchase of the home is contingent on the buyer being able to secure a loan for the home that—along with the down payment—totals the sale price. The purchase contract will state the amount of down payment and the loan amount right on the offer, along with the pre-approval letter. The buyer can’t just walk any time and tell the lender that he or she wants to stop he process to activate the contingency. Rather, if the buyer can’t get the loan, the contract won’t proceed to closing.
Appraisal: Banks will also require that buyers make the contract contingent on an appraisal, and buyers paying all cash may also make the contact contingent on an appraisal. On this, however, the buyer has few options. If the property appraises at a lower rate than the agreed upon purchase price and the seller refuses to lower the price to the appraised value, the buyer can withdraw. Other than that, the option is the seller’s. If the seller lowers the price to the appraisal price, the buyer cannot withdraw. The appraisal contingency is not a point at which the buyer can simply decide to walk away. It’s only if the seller refuses to lower the price to the appraisal price.
Other contingencies. Of course buyers can attach any contingency to a contract, granted the seller agrees to it. Another common one is a sale contingent on the buyer selling his or her current home before purchasing the new one. But each situation is unique, so ensure you have the proper information when proceeding and have the proper documentation from the inspecting parties.
Yes, the buying process can be harrowing, particularly for first-time homebuyers. But remember: The contracts are written to provide fair treatment for the buyer—and the seller.
