FINANCING & APPRAISAL CONTINGENCIES
When writing an offer on a home, we HIGHLY recommend you include a few contingencies, especially if you’ll be getting a loan to pay for the property. Let’s talk a bit about financing and appraisal contingencies, what this means for you and for the transaction itself.
In our Buy Sell Agreement, which outlines the entire contract between buyer and seller for the purchase of a property, there is a significant portion of the contract outlining the contingencies that will allow for a contract to be terminated. For instance, if a buyer chooses to have an inspection contingency and they find in their due diligence period that there are simply more issues with the home than they are capable or willing to tackle, they can choose to terminate the contract and walk away. The contingency makes it allowable for them to do so and get their earnest money back. If they did not have the contingency in place, they would be committed to the purchase regardless, or else they would forfeit their earnest money and be subject to liability from the sellers. So therefore, contingencies are in place to protect both the buyers and sellers. Earnest money is common because it demonstrates good faith of the buyer’s intentions to stick to the contract in place.
Financing contingency allows for a buyer to terminate if their financing falls through for any reason. Loss of a job, sudden medical debt, or any other change in income could affect the buyer’s ability to procure the loan necessary to purchase a home. Therefore, financing contingencies are highly recommended in case of one of these unforeseen circumstances.
An appraisal contingency usually goes hand in hand with the financing contingency, as many banks will only loan out as much as the home is appraised for to a buyer. So, in other words, the bank doesn’t find it worth the risk to loan more than a property is worth. If an appraisal contingency is in place, the buyer can renegotiate price with the seller if the property doesn’t appraise, or else they might have to make up the difference in purchase price out of pocket in order to buy the home.
If a buyer does not have financing and appraisal contingencies written into the Buy Sell, they might be contractually obligated to buy the home regardless of these things going awry, and therefore it is usually in the best interest of the buyer to take advantage. However, if a buyer is paying cash and competing, it usually makes them more competitive as these contingencies take longer to satisfy. If a seller is interested in a quick sale that isn’t depending on funds from a third party, it is obvious that this buyer will be the most attractive.
Finally, and to reiterate, if a buyer does not have a financing or appraisal contingency written into their Buy Sell, but is depending on a loan to purchase the home, they might lose their earnest money and be liable to legal actions if the loan or appraisal falls through. This could mean that the closing date needs to move, or the sale might fall through entirely. And what’s more, if a Seller is depending on the settlement from this home to buy and move into a home they’re under contract for, this domino effect could be seriously detrimental and costly, not to mention extremely inconvenient and irritating, as there are a lot of moving parts involved with buying a home and moving in. Even further, you just cannot tell how many buyers and sellers down the line might be affected by this hiccup, as this seller may be a buyer for another home, whose seller might be a buyer and so forth…
As every circumstance is different, it is important to understand the specific risks and nuances of your own situation before making such important decisions. As always, the more you know the better off you’ll be.