If you undertake any sort of real estate transaction, you’re likely to hear the word contingency. In almost any real estate deal, there will be contingencies, and because they generally involve a great deal of your money, you should always understand them. They’re especially important in a competitive market.
What is a contingency? Unlike some real estate terms, this one means pretty much what it means in the rest of the world: a contingency is a provision for an unforeseen turn of events, and it’s designed to protect you in your real estate transaction. One of the most common contingencies is the home inspection contingency, which provides you, as a buyer, the opportunity to decide against moving forward with the deal if the inspection doesn’t go well.
Why contingencies are waived Given how many complications can arise during the purchase or sale of a home, it may seem strange that in some cases, buyers willingly surrender their contingency protection, but it does happen. Why? Well, it’s really very simple: Buyers will waive their contingencies because fewer ways out of the deal makes them a more attractive buyer. In fact, it’s a truism that the seller will almost always choose an offer with fewer contingencies.
Keep in mind that the offer you make for a home is comprised of more than just the money. It’s the total package of money, timing, and any special details you’ve negotiated (the inclusion of a light fixture with the property, for example). But another hugely important factor of the offer’s attractiveness is its stability. For example, an offer that’s 50% cash is more attractive than an offer that’s 20% cash, because there’s less financing that could fall through. In this context, a financing contingency represents a risk factor for the seller, because it gives the buyer power to walk away from a deal without financial loss in the event that the contingency is not met.
When contingencies are waived Waiving contingencies is most common in a seller’s market—that is, a market where the inventory of homes lags behind the demand, and sales typically become competitive. In such a market, waiving your contingencies might be your only choice. You may even encounter, in some especially competitive market where nearly every sale becomes a bidding war, sellers who are unwilling to consider offers with contingencies at all.
The risk of waiving a contingency The specific risk of waiving a contingency depends, of course, on the contingency itself, but the main risk to be concerned about is any deposit you might make. Without a contingency in place, your only choices when a cracked foundation turns up are to pay for it yourself, try to renegotiate the price in light of the discovery (although with no contingency, the seller really has no obligation to renegotiate), or walk away from purchase altogether, losing any deposit you’ve put down.
There may be situations when waiving your contingency protection makes sense, and even some where it’s the only option. But before you go through with it, be sure you fully understand exactly the risks involved.
