Home Buyers and Sellers Take Note: Contingencies are Back in the Game

As recently as this past summer, the Evergreen and Conifer real estate market blazed red-hot. The boom made life supremely easy for home sellers, with multiple buyers showering them with bids. At the peak of this super-competitive market, many buyers had to eliminate real estate contingencies from their offers, reducing their negotiating power. They felt this was necessary to get their bids taken seriously. After all, sellers were rejecting offers with contingencies in favor of those with none.  Frankly, I encouraged sellers to polish even the best offers into stronger contracts to their benifit.

Times have changed. Not only has the housing market begun to cool off, but winter is also the slowest season for residential real estate sales. Evergreen and Conifer have pronounced seasonality every year with inventory and the number of transactions grinding to a halt around the holidays.  As a result, contingencies are back on the table. Not sure what that means for you? Let's break it down.

What are real estate contingencies?

The Real Estate Commission approved Contract To Buy and Sell in Colorado does a terrific job of protecting buyers' earnest money buy stipulating contingencies for the most common problems experienced during escrow.  A real estate contingency is a clause included in a home purchase agreement that allows buyers to terminate the contract if the terms of the clause aren't met.  There are types of real estate contingencies with unique stipulations. Some common ones include:

Appraisal Contingency

This contingency allows the buyer to walk away (and presumably not risk losing their earnest money) from the deal if the home doesn't appraise at or above the contracted price. 

Mortgage Contingency

If the buyer can't secure a mortgage for the home by a specified deadline or if they aren't satisfied with the cost or availability of the loan--the buyer can terminate.

Title Contingency

Buyers can use this contingency to object to defects to the title or any conditions that will keep the title insurance from insuring against ownership claims.  It's fundamental to the process that the seller proves they are the owner and have an unrestricted right to transfer the ownership to the buyer.   This one should never be waived no matter how competitive the market is!

Homeowner's Insurance Contingency

Under this stipulation, either buyer or the seller may cancel the sale if the buyer can't obtain homeowner's insurance for the property.  This is especially important in some hard to reach places if the closest fire department is more than 10 miles away.  I helped work through this at the top of Saddleback Mountain...

Existing Home Sale Contingency

Many homeowners rely on the proceeds from selling their current property to fund the purchase of a new property. This contingency permits them to pull out of the agreement if they can't sell their existing home in time.

Home Inspection Contingency

I strongly encourage every buyer to get a whole house inspection and well test (if not served by one of the few water & sewer districts up here). The Colorado contract's built in inspection contingency stipulates, among other things, that buyers are to be satisfied by the physical condition of the property or they have a right to object or terminate.  That's pretty powerful!  But it's best exercised by employing experts to give opinions on the property (like a whole house inspector, engineers, roofers, radon tests, well tests, etc.). not everyone does a battery of inspections and in the peak of the competitive environment I saw buyers waiving or limiting this contingency.  But it is back and very helpful if unforeseen conditions are discovered during due diligence.

Real Estate Contingencies Can Serve Both Parties

Contingencies are written to help make sure the parties to the contract have an opportunity to understand exactly what they are buying and selling and can protect buyers' earnest money. However, this equation became unbalanced during the height of the home-selling boom. Although sellers could ask for removing any real estate contingencies they didn't like, and buyers felt pressure to forego essential protections to get their offers considered.

This has changed as the market slows. Buyers can feel more confident about insisting on certain contingencies to help them make a confident purchase. Meanwhile, sellers can increase their chances of a timely sale in a slower market by accepting the common contingencies in offers.