A Home Buyer’s Guide to Contingency Clauses

Young couple shakes hand with real estate agents and discussing home buyer contingencies — Home buyers with a realtor

When buying a home, you need a few protections. Just like buying a car, you must be careful not to buy a beautifully painted “lemon.” A house with poor maintenance and hidden flaws can become a financial trap and an eternal source of stress instead of the fresh new chapter of your life that a home purchase should be. This is why there are buyer contingencies.

If you are buying a home in the current fever-pitch housing market, you may have seen the advice to drop your buyer contingencies. This can make a bid for a home more competitive, but just what are you being asked to drop? What are buyer contingency clauses, why do you need them, and which ones should you drop as a strategic move to sweeten your offer? Stay tuned, that is exactly what we’re exploring today.

What is a Contingency Clause?

A contingency is a contractual protection. It says the buyer can back out of the purchase if certain criteria are not met. A common example is an inspection contingency, where a buyer can back out if their inspector finds any major repair issues that can’t be resolved before the sale. Placing this contingency clause in the contract protects the buyer from maintenance surprises and hidden flaws.

Top 5 Home Buyer Contingencies

Appraisal Contingency
Inspection Contingency
Financing Contingency
Home Sale Contingency
Kick-Out Clause

1. Appraisal Contingency

The buyer has 30-60 days to have the home appraised to ensure the property meets a set minimum value. This protects the buyer from overpaying for the property.

2. Inspection Contingency

The buyer has 10-60 days to have the home inspected by one or more experts to detect flaws or underlying maintenance problems. This protects the buyer from investing in surprisingly costly property.

3. Financial Contingency

The buyer has 30-60 days to secure or complete their financing to buy the house. This protects the buyer from purchase obligations if their financing falls through.

4. Home Sale Contingency

The buyer has X number of days to sell their existing home, then buy the seller’s home with the profits. If the existing home does not sell, the buyer can back out of the purchase.

5. Kick-Out Clause

This is actually a buyer concession. A buyer who asks for a home sale contingency can agree to a kick-out clause. This allows the seller to choose another buyer if selling the existing home takes too long.

How Contingencies are Determined in a Home Purchase Offer

Contingencies come from a combination of necessity and incentive. Buyer contingencies protect the buyer from investing in a home they can’t afford or that had flaws hidden during negotiations. However, buyers can also choose to take calculated risks and waive certain contingencies when the time is right. For example, if you know the home’s appraisal value (perhaps the seller had it appraised before listing) and your financing is pre-approved, you might waive the financing and appraisal contingencies.

Most buyers go with a standard set of contingencies from a template home purchase offer. This is partly why intentionally waiving a contingency or two can stand out as appealing to sellers.

How Home Buyer Contingencies Impact Your Offer Strength

How do buyer contingencies impact the strength of your home offer? Good question. This depends on the buyer and real estate agent. Waving contingencies saves time and offers more protection to the seller. It also shows confidence, especially if you are ready to put down earnest money into escrow. Sellers with a real estate agent who understands competitive bidding will see that waiving buyer contingencies will stand out. Just thoughtfully waive contingencies that provide convenience to your seller. This is what will make your bid more appealing.

That said, never waive your inspection contingency unless you have access to a very recent home inspection from a previous event.

Buyer contingencies are an important part of safely purchasing a home. When to waive them to sweeten a bid and when to hold onto your contingencies is a matter of risk and strategy. Work with your real estate agent to know the right strategy for your bid, your seller, and your circumstances. To find the right real estate agent to start your home buying journey, contact us today.

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