What Are Contingencies?

A contingency in a contract is a provision that requires a specific event or action to take place before the contract can be valid.

Contingencies in a California residential purchase agreement are paramount in protecting buyers on homes that they have not investigated and or fully qualified for financially.

Types Of Contingencies

While there can be all kinds of contingencies added to a contract, there are 3 main contingencies with a purchase agreement. Each contingency can be as long or as short as you want to make them, however, they also have a defaulted number of days as to create a standard. After all, the buying and selling of real estate is a time-sensitive business.

Inspection Contingency (17 Days)

Appraisal Contingency (17 Days)

Loan Contingency (21 Days)

The Inspection Contingency

Perhaps the most important and misused contingency in the contract. The inspection contingency allows for the buyer to complete any and all necessary due diligence on the property before they fully commit to making the purchase. Some of the inspections you might get on a home include but are not limited to: A general home inspection, a termite report, a title report, HOA docs review if applicable, a plumbing scope, foundation report, and roof inspection. 

A home purchase is often one of the most important and largest investments a person will make. So naturally, you want to make sure you are investing your money in a healthy asset, or, at the very least, only discover potentially small cost flaws. 

The inspection contingency is the #1 contingency used for pulling out of a contract. Often times it's because a buyer discovers a costly defect in the home. However, this contingency is also widely used as a "change of heart" clause. Because the inspection contingency is general and vague, a buyer will often misuse it when they simply change their mind on a home, aka buyers remorse.

The Appraisal Contingency 

This contingency is typically only used when the buyer is obtaining financing on the home and is pretty straightforward but can also cause issues with the contract price originally agreed upon. Essentially the lender who is loaning the money wants to double-check that the home is actually worth the contract price. It is like a check and balance system for the bank's investors.

The potential issue arises when the appraisal comes in low. This means that a 3rd party appraiser has done research on the home, neighborhood, and recent sales in the area and believes that the buyer (and lender) are paying too much for the home.

If this happens, there are simply 4 ways it can go. One, the seller can agree to come down to the appraised price of the home. Two, the buyer can make up the difference. Three, the buyer and seller can agree to meet somewhere in the middle. And four, the buyer can pull out of the contract. In my experience, the buyer and seller usually find a way to move forward.

The Loan Contingency

Often the last and final roadblock before it's smooth sailing to the close of escrow. More and more we are seeing lenders take care of in-depth qualifying before a buyer even makes an offer. This is a great thing. With the lenders doing so much upfront work, it ensures that there are fewer problems on the back end. A buyer that pulls out of a contract because the loan doesn't get funded can be devastating. The reason being that almost everything else with the property by this point in the timeline has been reviewed and agreed upon. While we are seeing fewer and fewer loan denials, they do still happen.

Other Notable Contingencies:

HOA Document Review

Preliminary Title Review

Sale of Buyer's Property

If you or someone you know is interested in buying, selling, or investing in real estate in San Diego, we would love to be their real estate resource. Feel free to contact us with any questions.