Think of a contingency clause as insurance. Once you find a home and make an offer, you hope everything will go smoothly; but in case it doesn't, you have a contingency clause in place that allows you to back out of the contract without losing money.
Most agreements already have a few key contingency clauses in place to protect against the bigger things -- such as a lower-than-anticipated home appraisal -- but there are contingencies that go beyond the norm. If you're about to make an offer, consider all of your options.
Some contingency clauses are commonly used when making an offer. Some examples:
- Home inspection: This gives the buyer the right to order a professional home inspection and back out of the sale if major unreported damage is found.
- Appraisal: The buyer won't be obligated to buy the home if the appraisal value is lower than the asking price.
- Mortgage availability: This gives the buyer time to find financing for the home. If the buyer can't find financing, either party can cancel the deal.
You don't have to stick with the standard contingency clauses. Depending on your situation, it may make sense to add additional clauses to the agreement. Some examples:
- HOA rules: If you're considering an area with a homeowners association, it may be prudent to require a copy of the HOA guidelines before you buy. HOA fees vary and if the dues are high, your annual homeownership costs will go up. Many HOAs also have rules on parking, landscaping, paint colors, and even holiday decorations. If you aren't happy with the HOA, you'll want the option to back out of the deal.
- Selling your current home: If you're trying to sell your home before you buy another one, you may want to put a selling contingency in place. If you're unable to sell your current home within a certain time frame, this contingency allows you to cancel your offer.
- Moving furniture early: With this contingency, you and the seller agree to allow you to move personal property in (or move in entirely) earlier than the seller anticipated. You may have to agree to pay the seller rent if you move in before closing, but it will spare you from putting your belongings in storage and finding temporary lodging.
Adding contingency clauses
A basic offer won't automatically contain any contingency clauses. While many Realtors include some standard clauses in every offer, you should work with your agent to make sure you're including contingencies for everything you can anticipate before you submit your offer.
Once you've submitted the offer, keep in mind that the seller may submit a counteroffer with his or her own contingency clauses as well.