Contingencies are provisions in a real estate contract that nullifies the contract if certain events were to take place, allowing for parties to walk away from the deal without penalty. These contingencies, or conditions, are set in place to protect both buyers and sellers alike from things that could go wrong in the transaction. In doing so, they are primary reason why real estate transactions can take weeks if not months to complete.
Common Contingency Types
There are several contingency types that can be included in a real estate contract. Here are some of the most common:
- Inspection Contingency:
Even if the home you are purchasing looks perfect to you, it’s possible there may be thousands of dollars worth of hidden repairs that are needed. In order to be sure the home you’re buying isn’t going to turn into a money pit, you should hire a professional home inspector to turn the home inside out and report any major problems – like cracks in the foundation or signs of mold.
The inspection contingency in a purchase agreement lets the buyer walk away from the contract if significant damage is found during the inspection process. Unfortunately, the inspection contingency can create the single largest source of stress and anxiety in real estate transactions given that each purchase is effectively negotiated twice. At Inspectify, we are huge fans of pre-listing inspections that allow buyers to have all the facts up front before they make an offer, creating a far more streamlined transaction.
- Appraisal Contingency:
Appraisals tell you whether or not the purchase price agreed upon in a real estate transaction is fair, according to the market value of the home and comparable homes in the same area. If the appraised value ends up being lower than the sales price, the appraisal contingency gives the buyer the ability to back out of the purchase or negotiate a lower price before moving forward.
Unfortunately, there is growing shortage of appraisers in the United States which has resulted in lengthy contingency periods, many being 15 - 20 days just to get the appraisal scheduled. Because of this, the Mortgage GSEs that govern the appraisal process are pushing for more "desktop appraisals" and leveraging alternative sources to complete the "physical" aspect of the appraisal. At Inspectify, we feel this is a huge opportunity to create more value out of the home inspection, leveraging the data collected during the inspection for the "physical" requirements of the appraisal.
- Home sale contingency:
Oftentimes, a buyer needs to sell their current home before they are able to buy a new one. With that in mind, purchase agreements often include home-sale contingencies so the seller doesn’t miss out on offers simply because the proposed buyer can’t sell their current house.
Home-sale contingencies let the seller move on from your contract if you can’t sell your home by an agreed upon date. Given the complexities this generates, home sale contingencies are often a red flag for sellers when considering an offer.
- Financing contingency:
Financing contingencies give the buyer a specified period of time to receive approval for a mortgage loan. Of course, you’ll need to be pre approved for financing before making an offer on your future home; however, even with pre approval, it is not entirely uncommon for financing to fall through unexpectedly.
- Title contingency:
A title contingency essentially grants the buyer access to review a title report documenting the home’s ownership history. This type of contingency is sometimes included in a purchase agreement as a way to allow for the buyer to review any existing easements on public record that may change their decision to buy. Another common use of title contingencies is to make the transaction contingent on the home or property being free and clear of any liens.
The Future of Contingencies
Enter the iBuyer
Over the past decade, significant innovation and investment has gone into companies offering Certainty as a Service (CaaS) in the real estate transaction, achieved removing one or all contingencies from the contract. A great example of this is the iBuyer model, made famous by Opendoor and Offerpad, where sellers can sell their home to large companies and close in under a week with no contingencies. Sellers pay for this certainty by selling at a slight discount to the market value of the home, which covers the renovation and holding costs of the purchasing iBuyer. This space has grown quite considerably in the past years with many new entrants joining the race, including Inspectify partner, Redfin.
Enabling Cash Offers
Given the steep discount sellers end up pay for the certainty of an iBuyer, many other models have emerged that allow for the higher purchase price of an open market combined with variants of the certainty provided by an iBuyer. One group including Inspectify partner, FlyHomes, offers a cash offer product that allows buyers to make all cash offers, leveraging the capital of the company and then later financing the home once it has closed with the original seller. This allows for a higher purchase price, but still has the complexities of the home sale, appraisal and inspection contingencies.
Making Homes Liquid
Further iteration by these companies along with new entrants including Inspectify partner, HomeLight, have created trade-in programs that allow clients to purchase their next home with the company's cash offer and then sell their existing home after they move in. This effort essentially creates more liquidity in real estate assets and allows an easier for moving from one home to another. Here the home sale contingency is removed and all that remains are the appraisal and inspection contingencies. Regarding the latter, there is development to waive the appraisal contingency through improved valuation models and new methods of collecting appraisal data along with a push for more pre-listing inspections to offer a full contingency removal.
At Inspectify, we see a world where most real estate transactions move freely without contingencies with a multitude of new tech offerings freeing up the constraints that have long hindered real estate transactions. As one of the only tech platforms focusing on reducing the risks covered by inspection and appraisal contingencies, we are excited to play a small part in changing real estate transactions for the better.