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  • Writer's pictureMeredith Adhate

What exactly are these "Contingencies?"

The market has gotten pretty hot in the last few months and everyone is throwing around the word "contingencies," especially as in, "waiving all of them." You obviously want a leg up trying to get your offer accepted, so should you be waiving these too? What exactly are they?

Wave hello to waiving?

Let's start with Earnest Money

When putting an offer in on a property, it's customary to offer some "earnest money" which is an amount of money given with an offer to indicate your interest in the property. Frequently, people will offer 1-2% of their total offer price in earnest money (though you can offer less or a lot more). This is a payment that goes TOWARD your total and is not an additional payment. If your offer gets accepted, you then have to give the seller's agent (or lawyer) that earnest money amount - so do they just get to keep your money forever??

No, and that's why contracts have contingencies. A contingency, in the context of a real estate contract, basically refers to a clause in the contract that would allow you to back out of the deal due to certain conditions and have your earnest money deposit returned to you. So what are these contingencies?

Inspection Contingency

This is the first one you'll come up against and is standard in almost all CT contracts. This clause says if you are not happy with the inspection results and you and the seller can't agree on repairs, a price reduction, or a credit, then you are allowed to cancel the contract and get your earnest money back. Some people have been waiving this contingency which I *never* like to recommend. There are a slew of things that can be wrong with a home and it's always good to get an inspection to know what may need repairs. (Looking at you, septic field!)

You know what's in that tube? $15,000 my friend.

Appraisal Contingency*

If you're getting a mortgage on a home, the bank will do an appraisal to see if the home is worth your offer (and therefore is a good investment for the bank to lend you money for). For example, if your offer is for $250,000 and the home appraises for $240,000, you're on the hook to provide that $10,000 difference in cash because the bank is only going to lend you up to $240,000. If you add an appraisal contingency, that means you're only going to pay as much as the appraisal and have the ability to ask for a price reduction down to the appraisal price or to cancel if the seller refuses. If you have the contingency, you'd get your earnest money deposit back. If you waive it, you'd be expected to pay the difference between your offer and the appraisal. Some people may be okay paying $10, 20, 30, 40k over asking, while others may feel a whole lot better paying for the home at its current value. *Appraisal contingencies are NOT included in our local contract, so it's something you'd have to add into the 'additional comments' line.

Mortgage Contingency

While it's a bummer, there are times when you do get denied for a loan for any variety of reasons - something was miscalculated, your income or job changed, your debt to income ended up being too high, your credit score dropped, etc. If this happens, you are also entitled to your earnest money back.

So what's the best technique?

It all comes down to personal preference and how comfortable you feel. While waiving any of these could indeed give you a leg up and get your offer accepted over others', would you feel secure doing any of these? In good faith, I can't personally recommend a buyer ever waive any of these, but drastic times call for drastic measures. Now that you know what the contingencies are, use your best judgment when submitting an offer!

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