There are three main home sale contingencies: home inspection, appraisals, and mortgage approval.
These contingencies are meant to protect you, the buyer. They allow a legal way to back out of the sale should something go wrong during the closing process.
Let's take a closer look at the types of contingencies and how they usually work.
A home inspection contingency, sometimes called a due diligence contingency, is part of every home sale unless you waive it. We encourage you never to waive it under any circumstances.
Its primary purpose is for a professional home inspector to reveal any flaws in the home so that you can re-negotiate or cancel the contract based on the findings.
Here's a few examples of what that might look like:
The appraisal contingency ensures that you can terminate the contract if the home does not appraise at that minimum amount. In most cases, your earnest money will be refunded if that occurs.
This type of contingency can also include terms that allow you to buy the home at the original price despite the low appraisal. Alternatively, you can request a lower selling price.
However, keep in mind that if you are financing the purchase with a mortgage, your lender might only cover the appraised cost.
Just like a home inspection contingency, the appraisal contingency shouldn't be waived.
A mortgage contingency states that the offer is dependent on you securing financing to purchase the home. It's beneficial in that it gives you a legal way out of the contract should you be unable to get approved for a loan.
However, sellers are often wary of accepting these types of offers as it lacks the assurance of financial backing.
Note that this contingency has a time limit for getting a home loan. If you cannot get approved on time and haven't terminated the contract before time runs out, you'd still be financially obligated to purchase the home.
So while this contingency is beneficial, you'd be better off getting approved for a home loan before making an offer.
A home sale contingency is when your offer is dependent on the sale of your current home. There are two types of home sale contingencies. We'll explain them below.
A sale and settlement contingency happens when you, the buyer, haven't yet received or accepted an offer on your current home. In this situation, the seller of the new home will be able to market their home to other buyers despite accepting your contingent offer.
Should another buyer make an offer, you'll have about 24 – 48 hours to remove the contingency and move forward with the purchase. If you're unable to remove the contingency, your sale contract is terminated, and you'll get your earnest money back.
A settlement contingency is when you, the buyer, have accepted an offer on the home you're currently selling, and you have a closing date on the calendar. This type of contingency typically doesn't allow the seller to keep marketing the home.
As long as your home closes on the date listed in the offer, the sale contract remains valid. But if the property doesn't close on time, the contract can be terminated, and you lose the home.
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“Total housing inventory at the end of December totaled 1.07 million units, down 16.4% from November and down 23% from one year ago (1.39 million). Unsold inventory sits at an all-time low 1.9-month supply at the current sales pace, down from 2.3 months in November and down from the 3.0-month figure recorded in December 2019. NAR first began tracking the single-family home supply in 1982.”
(See graph below):
Be patient during your home search. It may take time to find a home you love. Once you do, however, be ready to move forward quickly. Get pre-approved for a mortgage, be prepared to make a competitive offer from the start, and know that a shortage in inventory could mean you’ll enter a bidding war. Calculate just how far you’re willing to go to secure a home and lean on your real estate professional as an expert guide along the way. The good news is, more inventory is likely headed to the market soon, Lawrence Yun, Chief Economist at NAR, notes:
"To their credit, homebuilders and construction companies have increased efforts to build, with housing starts hitting an annual rate of near 1.7 million in December, with more focus on single-family homes…However, it will take vigorous new home construction in 2021 and in 2022 to adequately furnish the market to properly meet the demand."
Realize that, in some ways, you’re in the driver’s seat. When there’s a shortage of an item at the same time there’s a strong demand for it, the seller is in a good position to negotiate the best possible terms. Whether it’s the price, moving date, possible repairs, or anything else, you’ll be able to request more from a potential purchaser at a time like this – especially if you have multiple interested buyers. Don’t be unreasonable, but understand you probably have the upper hand.
The housing market will remain strong throughout 2021. Know what that means for you, whether you’re buying, selling, or doing both.
Understanding the Home Appraisal Process
Consumers are often confused by the home appraisal process. Often times they feel their home is worth much more than it is. Even when presented its neighboring comparables, and therefore, the appraised value doesn't make sense to them. It is imperative to know that appraisal guidelines are regulated and dictated by the lenders and the law. In most states, the lenders must disclose the purpose of the appraisal, as each situation carries its own set of rules.
In essence, lender guidelines force appraisers to put a fair market value on a home based upon comparable sales in the area where the home is located, as the home must be bracketed according to size and value. For example, there is no set amount associated with a great view, pool, spa, bathroom upgrades, etc. If a homeowner installs a custom pool that cost them $60,000, and the local marketplace supports the value of a pool at $18,000, that item will be bracketed as [$18,000] on the appraisal.
Upgrades can usually be estimated at full value in newer homes since they required investing additional money onto the cost of building the home. On the other hand, the amount invested in upgrading or remodeling an older home is rarely reflected in full in the final appraisal. The reason is the home had value in its original condition, and again, the value of the upgrades must be supported by comparable examples within the same marketplace.
These comparisons must be drawn from current market activity within the last six months. Some lenders may want to look at both closed and pending sales to see if there is any room for negotiation. This is a safeguard to prevent appraisers from over-valuing the home in question. It is further stated in the guidelines that appraisers can only place a value on homes that have closed escrow. However, when property values rapidly increase within a marketplace, appraisers are generally permitted to make concessions and put more weight on the evidence provided by comparisons to pending sales and listings. This allows for a "real time" appraisal.
Although there is no formal standard to speak of, most banks give the appraiser a 5% margin of error. If the file is reviewed and the appraiser is off by 8%, there is a good chance the value will be cut by the full 8%. It is in the best interest of both the appraiser and the homeowner not to push the value up higher than the market will support, otherwise the property evaluation may be exposed to a strict appraisal review.
As a realtor, I compare past sales and current listed properties to come up with best prevailing value. With basic math and a touch of packaging, we almost always hit our target. This of course is granting the the sellers are on board with my sensible calculations and inputs.
If you are ready to start your buying or selling process
give me a call at 562-477-2963 - I´m happy to answer all your questions.