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  • Writer's pictureTeam Pinto

What are Real Estate Contingencies and How Do They Affect Buying a Waterloo Region Home?

Real estate markets are booming, including the Waterloo Region real estate market, and buying a house is still one of the best ways to create wealth. In every real estate purchase, however, there are no guarantees. Because every seller, buyer, scenario, and home is unique, there is an element of surprise in how the process will unfold.

Given the amount of uncertainty, the size of the acquisition, and the number of parties involved, you want to protect yourself against the unexpected as a buyer. That's why most home transactions are "contingent" on what occurs next, allowing buyers to back out if something goes wrong as the deal progresses through the process.

In Real Estate, What Does Contingent Mean?

"Contingent" means "dependent on particular circumstances" in any sense. When a house is classified as contingent in real estate, it signifies that an offer has been made and accepted, but certain extra requirements must be met before the deal can be completed.

For example, if a seller offers a certain amount and you, as the buyer, say it's great (as long as the home inspection passes), you've entered into a contingent real estate contract. In this situation, the house's sale is contingent on the inspection finding no faults that are specified in the contract.

What Is A Contingent Offer and How Does It Work?

You've stated that a certain condition must be met before the transaction can proceed with a contingent offer. If it doesn't, the contract is null and void, and the seller is free to pursue a backup offer made while the sale was contingent. Contingencies are frequently utilized in real estate transactions to safeguard buyers against faulty home listings or unforeseen concerns.

Returning to our previous scenario, let's assume the offer is conditional on the home inspection revealing a roof life of 15 years. If the inspection determines that the roof has only 7 years left, the residence will be placed on an active contingency status. The property seller may then elect to repair the roof or change the price, or the potential purchasers may choose to cancel the contract, which they are free to do because the contingency was in place.

What Are Common Real Estate Contingencies?

Keep in mind that a seller may prefer an offer with no conditions attached. Of course, the buyer wants to make an offer that protects them by including contingencies, because if you back out of your offer without a contingency escape clause, you risk losing the earnest money you provided to secure the sale.

Adding contingencies can be problematic, especially in a "hot" market where there is a lot of activity in the real estate market. Other potential buyers may make an offer without a contingency, making their offer appear more enticing than yours and increasing the likelihood of the seller accepting it.

For example, if you have a stipulation that your own house must sell before you can finalize another property purchase, but another buyer's offer does not, the seller may opt not to wait for that to happen. You should utilize the contingency clause sparingly to ensure that your offer is as appealing as possible.

Are you wondering what contingencies you should think about? Here are a few of the most common.

Contingent on a Home Inspection

The home inspection contingency permits a home inspector to analyze the condition of the home, looking for things like grading and flashing that aren't evident to the naked eye or that the current buyer could overlook. If the inspection discovers major problems in the home's condition that have been specified in the contract, the buyer may withdraw from the transaction, or the buyer and seller may negotiate who would pay for the repairs.

In other words, even if you have a home inspection contingency, you don't have to back out just because the house has a flaw. You and the seller might be able to come to an agreement on how to cover and handle the repairs.

Mortgage Contingency

A mortgage contingency allows the buyer to acquire financing in a certain length of time. The good news is that this is a financial risk that can be mitigated to a large extent by conducting due diligence. For instance, make sure you've been preapproved, not just prequalified, for a mortgage as a buyer.

Preapproval gets you one step closer to receiving a mortgage because it requires you to fill out a lot of documentation up front to ensure your finances are in line. But keep in mind that just because you've been preapproved doesn't imply you'll be able to get a loan. After you've made an offer, you'll want to double-check with your lender.

Because you've already gone through the majority of the paperwork during the preapproval phase, everything should fall into place. However, there are still some factors that can throw you off, such as if you've switched employment, had your credit score drop, or had another financial crisis that makes you an unsuitable candidate. It's critical to keep a close eye on your finances during this time to avoid any unpleasant surprises after your mortgage is completed.

Appraisal Contingencies

When you're getting a mortgage, the appraisal contingency comes into play the most. Given the neighborhood's values, the seller may be asking for a staggering amount, and you may be more than willing to pay it. However, the asking price does not always reflect the home's worth. Lenders want an appraisal, which is a third-party assessment of the home's true value.

Even if both parties agree on a sale price, the lender will not provide you a loan for more than the home's appraised value. Meeting that appraisal figure can be difficult in an overheated or rapidly shifting real estate market, but it doesn't mean you're out of luck.

You may be able to overcome this if you have the resources to pay more upfront to make up the difference between the amount of the mortgage loan and the agreed-upon purchase price, or if you can renegotiate.

Title Contingency

This piece of paper has fooled many consumers. The title to the house tells who owns it now and who has owned it in the past. Sometimes, though, houses might not have "clean titles." They may have encumbrances such as easement difficulties or a previous mortgage lien.

Any claims against the title can put a buyer's acquisition at risk. The good news is that prior to closing, title searches should uncover any issues. Even if there is a problem that you can fix, it's a good idea to buy title insurance to protect yourself from future claims.

Contingency on a Home Sale

This contingency pertains to the buyer's financial status and states that the sale will only proceed if your current home sells first. While this can safeguard you, in a seller's market, it's usual for sellers to reject this since they know there may be another bidder who doesn't have this restriction.

Of course, this does not imply that you must have the funds to purchase the new home before selling your old one. Your lender might be able to assist you with a "bridge loan" or other financial options.

Another option is to request a later-than-usual closing date, which will allow you more time to sell your home. Remember that some sellers may reject your offer if they want to close the transaction quickly, but it may appeal to other sellers who are looking for a new house or who want to continue the school year in their current home, for example.

When it comes to house hunting, what does a contingency mean?

You'll be more prepared when you come across an active listing with a contingent status when house hunting now that you've learned about common contingencies.

Perhaps if you have your heart set on a certain house, your real estate agent will likely advise you to keep looking at houses and even make other offers while the house you like is on the market as a contingent listing. This is especially true in markets with little home inventory and lots of buyers.

The last thing you want is to put all your eggs in one basket and then have your offer cancelled because a contingency failed to materialize. You might also want to negotiate terms that restrict the seller's ability to accept fresh offers. As always, rely on your real estate agent to assist you in negotiating the best terms possible.

Getting ready to buy a Waterloo Region home, or sell the one you own? Let Team Pinto use their huge local real estate experience and expertise to help you. Contact the award-winning Team Pinto here, or book a free Zoom consultation to discuss your unique Waterloo Region real estate needs here.


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