Realtor explaining a real estate contingency to first time homebuyers

Real Estate Contingency

Most homebuyers in Californians rely on a Realtor to guide them through the process of buying a home. Since 2005, there have been between 384,670 and 753,880 homes sold per year in the state of California1. Each of these sales included a purchase contract, and most purchase contracts have at least one real estate contingency.

What is a real estate contingency?

A real estate contingency is a requirement that is included in a purchase contract to protect the buyer and/or seller. The requirement must be satisfied before the transaction can close. Both the buyer and seller must sign off on the contingency upon the requirement being met.

Real estate contingency examples

In California, there are six main real estate contingency examples: home inspection, appraisal, loan, title review, review of seller’s documents, and sale of home. Below, I’ll cover the important aspects of each of the six main real estate contingencies.

Home Inspection

A home inspection is a real estate contingency that most home buyers have in place when they enter into a contract to purchase a home. A home inspection is when the buyer hires a licensed real estate inspector to asses the safety and overall functionality of the home they are buying.

Here are the key areas a home inspector assesses for safety and overall functionality.

  • Foundation
  • Structural
  • Roof
  • Windows
  • Electrical
  • Plumbing

Your typical cost for a licensed real estate inspector is between $300 and $500. In California, a home inspection real estate contingency is typically in place for 17 days (once the purchase contract is agreed upon and signed by all parties).

Appraisal

The appraisal is also a real estate contingency. What is an appraisal? This is when a buyer hires a licensed real estate appraiser to view the home they are buying and determine the current market value.

If the current market value is above the agreed-upon price, then the buyer has additional equity in the home post-closing. If the current market value is below the agreed-upon price, then the buyer might have to increase their down payment and/or renegotiate the agreed-upon price.

Here are the key components of an appraisal report in California.

  • Type of home
  • Location of the property
  • Condition of the home
  • Square footage of the home
  • The home’s layout and functionality
  • How it compares to recent sales in the area

The typical appraisal cost is between $500 and $700. Purchase contracts in California usually allow for a 17-day period for the appraisal contingency to be completed and cleared.

Loan

The third real estate contingency is the loan contingency (provided you are obtaining a mortgage to finance the purchase of the home). A loan contingency allows the buyer to cancel the purchase contract if they are not able to obtain financing.

Here are the main components to obtaining a loan approval.

  • Your completed loan application
  • All of your necessary income and asset documentation
  • A fully executed purchase contract with all amendments

Once an underwriter has received a completed loan file with all necessary items, it generally takes them 24 – 48 hours to review the file and issue a loan approval (longer if loan volume is high). The standard California purchase contract usually allows for a 17-day period for the loan contingency to be signed off.

Title Review

In California, there is a real estate contingency based on the review of the title report. The title report contains the following key information about the home.

  • Who currently owns the home
  • If there are any liens against the property
  • Property tax amount if they’ve been paid
  • Easements attached to the property

Unfortunately, many homebuyers do not take the time to review the title report even though it is one of the main real estate contingencies that is pre-built into a California purchase contract. If you are buying a home, I highly suggest you take the time to review the title report.

The standard purchase contract in California allows for a 17-day period for the buyer to complete their title review.

Review Of Seller’s Documents

When you buy a home in California, the seller must supply certain documents and disclosures to the buyer2. Reviewing the seller’s documents might just be the most time-consuming real estate contingency due to the number of pages a buyer has to review.

Here are the typical seller’s documents you’ll need to review.

  • HOA documentation (if applicable)
  • Lease documents (if applicable)
  • Environmental disclosures
  • Known issues disclosures
  • Termite/pest disclosures

Some of these documents (HOA documentation) are hundreds of pages long. Discuss with your Realtor the key information you should look for before you review the seller-provided documentation.

If the offer was made using the standard California purchase contract, the buyer has 17 days to review the seller’s documents.

Sale Of Home

It’s not uncommon for the buyer to include a “sale of home” real estate contingency in their offer. Many buyers use the proceeds from the sale of their current home as the down payment towards the purchase of the new home they’re buying.

Here are the key aspects to the sale of home contingency.

  • Buyer requires the sale of their current home must close before they can close on the purchase of the new home.
  • It’s not uncommon for the seller to review the buyer’s current home and the sale price to ensure there’s a realistic chance the property will sell.
  • The seller will usually require the buyer to provide updates as to when the buyer accepts an offer.

The sale of home contingency is one of the most important requirements within the six main contingencies since the sale of the property usually funds the buyer’s downpayment. Also, the underwritten approval might require the buyer to sell their home before closing the purchase transaction.

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Real estate contingency add-ons

California purchase contracts can have real estate contingency add-ons. What is a contingency add-on? It’s a real estate contingency that is added to the purchase contract, typically using an addendum, which sets a requirement that must be satisfied prior to the closing of the transaction.

Purchase Of Home

The “purchase of home” real estate contingency add-on is something a seller might put into the purchase contract if the seller has not secured a home to move to post-closing.

A seller may request a purchase of home contingency that protects the seller in case they can not find a new place to live. A seller may request the purchase of a home contingency be for 30, 60, or even 90 days.

Repairs

Let’s say the buyer is aware that a pipe is leaking in one of the bathrooms. The buyer can add a contingency requiring the seller to repair the leaky pipe prior to the closing of the transaction.

Sometimes, repairs are discovered during the home inspection. If that is the case, the buyer can use the home inspection report to create a real estate contingency add-on to repair the problem the inspector discovered.

Permits

A buyer can include a real estate contingency add-on for permits when the home has known structural changes. For example, if the home has an addition to the home, the buyer can require the seller to provide the permits issued to ensure the recent addition is legal and completed to local code requirements.

Pest Inspection

Termites are a big problem in California. Buyers can require a real estate contingency add-on for a pest inspection to see if the home has or has had termites. Termite repair can be costly, so it’s important for buyers to have pest inspection real estate contingency in place when they make their initial offer.

Should you waive a contingency?

For most homebuyers, the answer is no, especially for first-time home buyers.

Waiving a contingency puts a sizable risk on you, the homebuyer. For example, if you waive your inspection contingency and the report comes back showing a major issue with the home, you still have to buy the home, or you will lose your earnest money deposit.

Here is another example: if you waive your loan contingency and cannot obtain financing to purchase the home, you will lose your earnest money deposit.

Real estate contingency bottom line

When buying a home in California, a real estate contingency is key to protecting the buyer in case something goes wrong with the transaction. The six main real estate contingencies are built into the standard California real estate contract for a reason, and all homebuyers should use them to their benefit.

Sources:

  1. California Home Sales – Statista.com
  2. California Law On Disclosure Duties – WolffLaw.com
Loan Officer Kevin O'Connor

About The Author

Loan Officer Kevin O'Connor has over 17 years of experience as a Mortgage Loan Originator and is a trusted resource for mortgage education and information. He's licensed by the state of California and the Nationwide Mortgage Licensing System. He has a top rating with the Better Business Bureau, Google, Yelp, and Zillow. You can contact him at 1-800-550-5538. CA DRE #01499872 / NMLS #247447