What homebuyers need to know about contingencies

Key takeaways

• Clauses covering appraisals, financing, inspections, title issues, insurance, homeowners associations and septic tanks give buyers a legal way to walk away when serious problems emerge.
• While real estate professionals generally recommend including contingencies, buyers in hot markets may face pressure to waive or limit them.
• When issues arise, buyers and sellers can often renegotiate instead of canceling.

Imagine getting your offer on a house accepted only to discover the property is infested with black mold or termites. Or imagine finding out your lender won’t approve your mortgage or learning the home is worth less than you agreed to pay.
In these situations, buyers may be able to walk away — without losing their deposit — if their purchase contract includes contingency clauses that allow the deal to be canceled when something goes wrong.

Real estate professionals advise buyers to include contingencies to protect themselves. But there’s a tradeoff: In competitive markets, sellers may favor offers with fewer conditions.

Here are the most common contingencies buyers should understand.

An appraisal contingency allows a buyer to cancel if the lender declines the mortgage based on the home’s appraised value. Lenders require an appraisal to make sure the home’s value isn’t less than the loan.

Appraisal contingencies are standard in most contracts, said Jessica Vance, owner of Jessica Vance Real Estate and Mortgage in San Diego, California.

"That leaves the remaining 70% to 100% that the bank is taking a risk on," she said. "The bank wants to ensure the house is worth the loan amount. If it's not, the buyer is paying more than the house is worth."

A low appraisal doesn’t have to kill a deal. Buyers and sellers can renegotiate the price.

A financing contingency allows a buyer to cancel the sale without penalty if they can’t secure a mortgage.

“There are very few situations where this type of contingency shouldn’t at least be considered by the buyer,” said Darren Robertson, founder and agent of Northern Virginia Home Pro in Arlington, Virginia.

For sellers, the risk is having to relist the home if financing falls through.

A home sale contingency protects buyers who must sell their current residence before buying a new one. If the home isn’t sold by a deadline, the buyer can walk away from the contract. Sellers use a similar clause allowing them to back out if they’re unable to buy a new home before closing on their old one.

Buyers can make their offer more enticing if they don’t include this contingency, but it may be worthwhile if they are unsure when their home will sell.

A title contingency protects buyers if a property has a lien — an unpaid debt that must be resolved before ownership transfers. The goal is to ensure the home has a clear title. Liens can delay closings and increase the risk that a deal falls apart.

This type of contingency makes it possible for buyers to cancel a contract if they discover the property cannot meet their intended use. A feasibility study contingency is most common where a buyer intends to make significant changes to a property, such as buying land for a new-construction home or tearing down a house to build a new one.

This clause states that even though the home is under contract, the seller can continue marketing the property. If the home seller finds another strong buyer, then the first buyer under the contingencies now has a specific amount of time to finalize the sale. If the seller finds another strong buyer, the initial buyer has a set period to move forward or step aside.

This ensures that the buyer can obtain home insurance, a factor particularly important in areas prone to disaster.

A home inspection contingency allows buyers to back out if a professional inspection uncovers serious issues, such as roof failure, plumbing problems or mold.

Every contract should include one, Robertson said.

“Generally speaking, any pushback from a seller regarding an inspection contingency should be viewed as a red flag,” he said.

A poor inspection doesn’t always sink a deal, said David Sokolowski, a broker with Bond New York Properties in New York City.

“At the very least, having this option helps a buyer with negotiating a seller’s concession toward the cost of repairs or renegotiating the purchase price of the property," he said.

Buyers must also decide whether they’re willing to take on repairs themselves.

A septic contingency is essential for homes without municipal connections, said Donnell Williams, a broker with NextHome Prime Properties in Fort Washington, Maryland. Septic contingencies ensure the system functions properly. Inspectors typically review the tank, distribution box and drain field.

When it comes to rural areas in particular, "property buyers must never disregard this essential condition,” he said.

Some jurisdictions also require septic assessments on vacant land before construction begins.

Buyers of condos and homes governed by a homeowner’s association should also include a resale package review contingency, Williams said. Maryland law, for example, allows buyers five days to review condo documents.

“You can cancel your purchase without any issues when you discover HOA restrictions on basketball hoops or excessive condo parking fees amount to $600 a month,” he said.

A failed contingency doesn’t automatically end a deal. Buyers and sellers can negotiate — often with the help of an agent — to reach new terms.

Buyers may seek:

• A lower purchase price 
• A credit at closing to cover repairs or closing costs 

Sellers typically do not cover a buyer’s down payment. Negotiating power may increase when:

• A home has been listed for more than 30 days 
• The market favors buyers over sellers 

Financing contingency

• Ask for more time to secure another loan 
• Request a price reduction 
• Ask if the seller will finance the sale 
• Explore a rent-to-own agreement 

Low appraisal

• Renegotiate at the appraised value 
• Pay the difference out of pocket 
• Review the appraisal for errors 
• Order another appraisal 
• Switch lenders 

Title lien

• Verify the lien 
• Ask if the lien holder will reduce or forgive it 
• Request the seller pay the lien before closing 
• Renegotiate the price to cover the cost 

Costly repairs

• Ask the seller to make repairs 
• Request a price reduction 
• Ignore cosmetic issues 
• Buy the home and repair it yourself 

Sale-of-home contingency

• Ask the seller for more time to find a buyer 

More on this topic:

• What does contingent mean?
  

This story was updated on May 15.