A typical offer for real estate will contains one or more contingencies or escape clauses for the buyer. Should the contingency not be satisfied, the buyer can be released from the contract and have their deposit refunded. Contingencies weaken an offer because the property is off the market until it is satisfied. For instance it can take weeks before a buyer is sure they will be able to get financing on a property. If they fail, the seller has to start over again, and of course time is money as they say.
Here are the most common contingencies found in an offer for real estate:
Financing Contingency
A financing contingency allows the buyer to be released from the purchase and sale contract should they not be able to obtain a mortgage for the property. The buyer could be denied because they don't have adequate credit or the property doesn't appraise for the purchase price.
Appraisal Contingency
Even cash offer can contain an appraisal contingency. Should the property not be appraised for it's full purchase price the buyer can be released from the contract if the seller is not willing to renegotiate.
Inspection Contingency
With an "as-is" contract the buyer can be released from the contract if they find anything they don't like. With a conventional contract the seller would be responsible for fixing problems over a specific dollar amount and the buyer is still tied to the agreement. The contingency will usually be for an agreed time period, typically 10 to 15 days.
So you can see how an offer without contingencies is stronger and worth more than one with a higher dollar amount and no contingencies. For example, if you have a contract for $200,000 but it has an inspection contingency and a financing contingency two things can possibly happen. The buyer's inspector can find problems with the roof or foundation and expect a repair credit or release from the contract. If the lender's appraiser decides the home is only worth $190,000 then again the buyer will expect to adjust the price or be released from the contract.
Contingency For Sale Of Another Property
A contingency clause that allows for the cancellation of the contract if another property the buyer is trying to sell are rarely accepted. This may weaken the offer more than any of the others and most sellers will be reluctant to accept it. It means the seller is taking their property off the market for an extending period of time for a contingency they have no control over. The buyers other property may never actually sell. Before a seller considers accepting an offer with this contingency they should know more about how it is positioned to sell and preferably it should be under contract without any contingencies of it's own. An alternative to this is for the buyer to request a right of first refusal until they get their home sold.
If you are a buyer and you are making offers in a competitive market be sure to keep your contingencies to a minimum. If you a seller, a cash offer, free of contingencies should always be considered even if it is not as high as one with contingencies.
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