3 Factors That May Kill Your Real Estate Transaction
Going from renting to buying property is a milestone representing independence. For most of us, buying a house is probably the biggest financial leap in our lives. So, it's best to be organized and proactive regarding the terms of the sale and, most importantly, be aware of the condition of the house in question.
As Investopedia mentions, when buying or selling a house, a contingency clause can be part of the purchase agreement. A contingency is a simple statement specifying that certain conditions must be met before the sale can proceed. Some contingencies refer to the timing of the deal. Most refer to repairs, while some refer to financing. No matter what the details may be, a contingency spells out the specific responsibilities usually of the seller — responsibilities that need to be addressed before the deal can conclude. Here are three of the most common types of contingencies and how they can impact a transaction.
Inspection Contingency
Obtaining a report from a certified home inspector is probably the most common contingency clause during a purchase. In short, the buyer will not go through with the purchase until the house has been examined from top to bottom. If inspections do not give a favorable report, the buyers are within their rights to walk away from the potential purchase. Note that some US states, but not all, stipulate the inspector must be licensed.
During an inspection, a knowledgeable professional scrutinizes the house for sale — from the foundation to the roof, the HVAC, plumbing systems, and more. Quicken Loans refers to these inspections as a way to protect both buyer and seller. They also describe how to best approach the back-and-forth regarding the repairs necessary before ownership transfers. Most often, if the seller and buyer agree, necessary repairs or compensation for these repairs can be negotiated, allowing the sale to go forward.
Appraisal and Financial Contingencies
Closely tied to inspection contingencies is an appraisal. This is an estimate by a third party to determine the house's worth. The appraisal works as the collateral for the lender offering money to the buyer. If the appraisal doesn't meet or exceed the selling price, a sale can fall through. Bankrate describes how an under-appraised house gives buyers the chance to walk away. However, sellers may want to intervene, offering to cover the difference between the appraisal and the selling price.
The third most common contingency has to do with buyer financing. If the buyer's goal is to obtain a mortgage, that process relies on the buyer's credit report, including their debt ratio. As Forbes states, if the buyer cannot secure a loan, a contingency written into the contract allows the buyer to walk away from the sale if they cannot secure financing from a lender, bank, or other mortgage company. In this case, depending on the contract, the seller often retains the earnest money to compensate for the time their house was off the market.