Putting an offer on a home and going under contract is a major step toward making what is likely the biggest purchase of your life – so it can be nerve-wracking when there are still unknowns, such as the condition of the home, its true market value and whether you'll remain financially stable through closing.
You have the option to protect yourself when you go under contract by making a contingent offer on a house. Contingency clauses are common in real estate contracts, and they can help protect you from loss of your escrow deposit or even a lawsuit should your real estate transaction fall through.
What Is a Contingent Offer?
A contingent offer on a home includes a clause that protects the buyer and makes it easier to back out of the deal without financial penalty in certain circumstances. Depending on the type of contingency specified, the buyer could have more power to renegotiate the price if the inspection reveals significant faults in the house, the lender rejects the mortgage application or the buyer is unable to sell his or her current home to free up cash for the down payment.
Types of Contingencies in a Home Purchase Offer
There are contingencies for a wide range of scenarios that can occur while a property is under contract, with one new type that addresses the effects of the COVID-19 pandemic.
Typically, only one or two contingencies are included in an offer, since a seller is less likely to be interested in a contract allows the buyer to back out too easily.
Here are five contingencies a homebuyer may include in an offer:
- Coronavirus contingency.
- Mortgage or funding contingency.
- Home inspection contingency.
- Appraisal contingency.
- Sale and settlement contingency.
Coronavirus contingency. For homes that went under contract before stay-at-home orders went into place and unemployment rates skyrocketed nationwide, you won't find a contingency that factors in the pandemic.
“No contract in the country will contemplate for a pandemic of this nature, so off the bat, there will likely not be a clear out in the contract for a pandemic or health issues,” says Pierre Debbas, partner and founding member of law firm Romer Debbas LLP in New York City.
But for those making an offer in the midst of the new reality of a global pandemic, that’s changing. Coronavirus contingencies factor in the less-predictable effects the pandemic could have on the buyer's or seller’s health, employment status or how the lender is able to finance the loan.
During these stressful times, a coronavirus contingency can help a buyer who is suddenly overwhelmed about unknowns in the near future. “It is to give the buyer a little bit more leniency if they want to walk away,” says Annemarie Stephens, associate broker with Coldwell Banker Residential Brokerage in the District of Columbia.
Mortgage or funding contingency. The vast majority of homebuyers are only able to afford a home purchase with a mortgage. The National Association of Realtors reports that 86% of homebuyers financed their mortgage as opposed to paying cash, according to its 2020 Home Buyers and Sellers Generational Trends Report.
If you’re worried about a lender denying approval for a mortgage, you may include a mortgage or funding contingency when you make an offer on a home to avoid losing your deposit should the deal fall apart as a result.
Home inspection contingency. A common contingency in a home purchase contract focuses on the results of the home inspection. Home inspections are often required by lenders, and many homeowners want them since they can uncover major issues with the house that aren’t obvious.
If the home inspector finds cracks in the foundation or asbestos or mold, for example, the buyer will likely want to renegotiate the price or ask the seller to pay to fix the problem. If negotiations at this stage fall apart, the buyer can walk away.
During the pandemic, home inspectors are asking sellers, buyers and real estate agents to stay away during the inspection to avoid contact with other people. Inspectors are also trying to avoid touching additional surfaces as much as possible, and won’t move objects or furniture to get to some normally examined spaces.
“If he can’t get to the furnace, he won’t get to the furnace,” says Nan Smith, real estate broker for Baird & Warner in the Chicago metro area. If the inspection is incomplete as a result, a homebuyer may think twice about the deal.
Appraisal contingency. For homebuyers getting a mortgage, the appraisal is often a necessary step – a bank doesn’t want to provide more funding for a home than it’s deemed to be worth. An appraisal contingency leaves room for the buyer to try to renegotiate the price if the appraisal comes in too low on the home. If the lender denies the mortgage based on the appraisal, the buyer could walk away from the deal.
These days, appraisers are trying to refrain from entering an occupied home for an appraisal. “They’ll probably opt to just do a drive-by (appraisal),” Smith says. This includes using public documents, interior photos, details of recent renovations and an exterior examination of the property. Whether a drive-by appraisal is more forgiving than a standard appraisal is unclear and likely varies by appraiser and lender.
Sale and settlement contingency. Many homebuyers currently live in a property they own, and need to sell it in order to afford their new house. A sale and settlement contingency stipulates that the buyer must be able to sell a home before being able to close on the new property.
To make sellers more inclined to accept a sale and settlement contingency, the clause often allows the seller to keep his or her home actively for sale. If a better offer comes along while the buyer is still trying to sell her home, the seller can back out of the deal to move forward with the new offer.
With a settlement contingency, the buyer’s purchase will only go forward as long as her sale closes. If the closing of her first home is delayed, the closing of her purchase will be delayed as well.
Because so many buyers need the profits from a home sale to be able to make the down payment on their next house, settlement contingencies may be a necessary part of many real estate contracts.
How Often Do Home Sales Fall Through?
Historically, the share of home sales that fall through before closing has been minimal. Real estate information company Trulia reported in 2017 that 3.9% of home sales failed in 2016, but little research has been dedicated to sale failures since.
Especially if you’re a seller working with an experienced real estate agent, you’re less likely to face issues with the inspection or appraisal, since the asking price should be close to its market rate determined in the appraisal and major issues with the house will have been fixed or disclosed prior to the inspection.
While there are certainly people who can no longer afford their down payment or have put off purchase plans until their employment is more stable, those who have gone under contract since the start of the pandemic appear eager to move forward. “I have not personally seen anyone trying to walk away,” Stephens says.
When to Accept a Contingent Offer on Your House
As the seller, whether you accept an offer that includes a contingency depends on your willingness to endure the different circumstances that may arise.
Many sellers are willing to negotiate over repairs, come down slightly in price post-appraisal or wait to see if the buyer can sell a home before closing. You have the right to decline an offer based on contingencies you aren’t willing to accept, however.
Homebuyer activity has dropped sharply during the COVID-19 pandemic, so sellers who are looking to close a deal now will likely need to be willing to accept a contingency or two.
Debbas says that condo developers looking to sell newly completed homes in New York City traditionally don’t accept contingencies. Now, however, they’re much more lenient. “If (you) want to try to conduct business during this pandemic, you have to adjust,” Debbas says.
Ensure a quick sale.
Selling your home quickly not only allows you to move on with your life, it also means fewer days of keeping your home in pristine condition and leaving every time your agent brings prospective buyers for a tour. According to real estate information company Zillow, the best time to list a home for sale is on a Saturday between May 1 and 15; homes listed during those times sell six days faster and for 0.7% more than the average annual home price. But how fast your home actually sells, and at what price, depends on factors beyond timing. Here are 10 secrets to selling your home faster, no matter when you list it.
Updated on March 20, 2020: This story was published at an earlier date and has been updated with new information.Pick a selling strategy.
Pick a selling strategy.
Before putting a for sale sign in your yard, it's important to pick the selling strategy that will work best for you. The for-sale-by-owner option may be best if you feel confident in your ability to market the home and negotiate. If your time is better spent on other details, a real estate agent could be best. If you need to sell the home quickly, you may want to inquire with an iBuyer, an entity that can make the deal close faster than the typical homebuyer. You should feel confident in the selling strategy you choose, and avoid switching from one to the other while your house is on the market. Buyers could be turned off by the constant changing of circumstances.Invest in a professional photographer.
Invest in a professional photographer.
According to NAR's 2019 Profile of Home Buyers and Sellers, 44% of recent buyers started their search online. Of those, 87% found photos very useful in their home search. If your listing photos don’t show off the features of your home, prospective buyers may reject it without even taking a tour or going to the open house. Hiring a professional photographer and posting at least 30 photos of your home, inside and out, is a good way to attract buyers. Photography is often free for home sellers, as shoots are often conducted at the expense of real estate brokers as part of marketing the property.Clean everything.
(People Images/ Getty Images)
Nothing turns off buyers like a dirty house. Hire a company to deep clean if you can’t do it yourself. “When the (home) is on the market, no matter what time of day or night, it should be clean and neat,” says Ellen Cohen, a licensed associate real estate broker with real estate brokerage Compass in New York City.
Key places to clean while your home is on the market include:
- Kitchen countertops.
- Inside cabinets and appliances.
- Floors and room corners where dust collects.
- Bathroom counters, toilets, tubs and showers.
- Inside closets.
- Windows, inside and out.
- Scuffed walls, baseboards and doors.
- Basement and garage.
Depersonalize the home.
Remove all your family photos and memorabilia. You want buyers to see the house as a home for their family, not yours. Remove political and religious items, your children’s artwork (and everything else) from the refrigerator and anything that marks the house as your territory rather than neutral territory. The same goes for any collections such as figurines, sports memorabilia or kids' toys that can make a buyer think less about the house and more about you. Family photos can be replaced by neutral art or removed entirely – just be sure to remove any nails and repair nail holes where any hanging photos used to be.Let the light in.
Let the light in.
People love light and bright, and the best way to show off your house is to let the sunshine in. Open all the curtains, blinds and shades, and turn lights on in any dark rooms. If the natural light situation is lacking in any room, strategically place lamps or light sources throughout to set the mood. And while your house is on the market, open all curtains and turn on lights every time you leave your house for work or errands in case you get word that a buyer would like to tour the space before you get home.Be flexible with showings.
Be flexible with showings.
Buyers like to see homes on their schedule, which often means evenings and weekends. Plus, they want to be able to tour a home soon after they find it online, especially in a hot market where they're competing with other buyers. If your home can be shown with little or no notice, more prospective buyers will see it. If you require 24 hours’ notice, they may choose to skip your home altogether. "That's one less person who gets to see the property," Cohen says. Be ready to leave quickly as well – if you're still cleaning up or hanging around outside when the buyer arrives, it can make for an awkward interaction.Set the right price.
Set the right price.
No seller wants to leave money on the table, but the strategy of setting an unrealistically high price with the idea that you can come down later doesn’t work in real estate. Buyers and their agents have access to more information on comparable homes than ever, and they know what most homes are worth before viewing them. A home that’s overpriced in the beginning tends to stay on the market longer, even after the price is cut, because buyers think there must be something wrong with it. "Pricing correctly on the lower side tends to work much better," Cohen says.Remove excess furniture and clutter.
Remove excess furniture and clutter.
Nothing makes a home seem smaller than too much big furniture. Rent a self-storage container or a storage unit and remove as much furniture as you can. It will immediately make your home seem calmer and larger. Remove knickknacks from all surfaces, pack them away and store the pieces upon which you displayed them. Take a minimalist approach to books, throw rugs and draperies, and clear off your kitchen and bathroom countertops, even removing appliances you normally use. If you can scale down the contents of your closets, that’s even better, because it makes the home's storage space look more ample.Repaint in neutral colors.
Repaint in neutral colors.
A new coat of paint will do wonders to freshen up your home, both inside and out. This is the time to paint over your daughter’s purple bedroom, nix the quirky turquoise bathroom and cover up the red accent wall in your dining room. Busy wallpaper can also turn off potential buyers. Your goal is to create a neutral palette so buyers can envision incorporating their own personal touches in the home. "You just want people to see the space for what it is," Cohen says. Rather than a stark white, consider neutral shades of gray, taupe and cream on the walls.Spruce up the front of your home.
Spruce up the front of your home.
You’ve heard it 100 times before, and it’s still true: Curb appeal matters. You don’t get a second chance to make a first impression. A new or freshly painted front door, new house numbers and a new mailbox can breathe life into your entryway. Fresh landscaping and flowers in beds or in pots also enhance your home’s first impression. Trim trees and bushes, tidy up flower beds, remove dead leaves from plants, clear out cobwebs from nooks near the entrance and pressure-wash walkways, patios and decks. Leave the outdoor lights on, too, because prospective buyers may drive by at night.Here are 10 tips to sell your home faster:
Here are 10 tips to sell your home faster:
- Pick a selling strategy.
- Invest in a professional photographer.
- Clean everything.
- Depersonalize the home.
- Let the light in.
- Be flexible with showings.
- Set the right price.
- Remove excess furniture and clutter.
- Repaint in neutral colors.
- Spruce up the front of your home.
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She has appeared in media interviews across the U.S. including National Public Radio, WTOP (Washington, D.C.) and KOH (Reno, Nevada) and various print publications, as well as having served on panels discussing real estate development, city planning policy and homebuilding.
Previously, she served as a researcher of commercial real estate transactions and information, and is currently a member of the National Association of Real Estate Editors. Thorsby studied Political Science at the University of Michigan, where she also served as a news reporter and editor for the student newspaper The Michigan Daily. Follow her on Twitter or write to her at email@example.com.