Well, I hate to break it to you, but buying a home isn’t like buying a pair of jeans. If you buy a pair of jeans, get home, try them on again, and then decide that you hate them, it’s usually no big deal. You just take them back to the store for a full refund.
But that’s not how it works when you buy a home. There are no refunds once that sale is final. You’re now responsible for everything in that home. But does this mean you’re stuck as soon as you have an accepted offer?
Well, thankfully, no. This is what contract contingencies are for. They give you a way out of the contract with no penalty if certain situations arise. They are vitally important for preventing a wide variety of bad situations, so it’s important to know about them and how they can protect you.
How do Contingencies Actually Work?
Contingencies are items that must be met before the purchase of the home is final. If something happens, the buyer can cancel the contract AND receive earnest money back. Earnest money is the percentage of the purchase price you put down (usually 1% in our area) when you have an accepted purchase contract.
During the time between the signing of the purchase contract and the home’s closing, both parties should be working to satisfy these contingencies. There may be dates set for certain contingencies after which there would be repercussions for backing out of the contract.
So, how many contingencies can you add to a purchase contract? As many as you want (the more you add, the safer you are from unexpected problems). But be aware that the seller may not agree to all of the conditions and too many contingencies weakens your offer, especially if there are multiple offers on the home you’re interested in.
Additionally, there may be situations when the seller proposes a contingency or two that you will have to agree to in order to move forward with the deal.
Contingencies Have Been Important in Portland
Contingencies have become especially important in Portland’s hot housing climate over the past couple of years. A hot market means that your offer has to be a great one to beat all the other offers you’re competing with, and poorly written contingencies (or too many of them) can hurt your offer a lot.
A great real estate agent can help you understand which contingencies you must have and which ones you may be able to do without in order to put forward the strongest offer possible. It’s a delicate balance!
Most Common Oregon Contingencies
Almost all contracts should have these important contingencies in them (in fact, they are included by default in Oregon real estate contracts). Any other contract contingencies can be carefully written in by the agent for approval by the sellers.
If you’re unable to get approved for a loan, you can cancel the purchase agreement without penalty. Without this important contingency, you might be stuck with a home that you can’t pay for. Unfortunately, loans aren’t guaranteed until they’re final. If your loan falls through at the last minute, you’ll be protected.
And it’s not just you that needs to qualify for that loan. The property also needs to qualify for the loan. The lender will order an appraisal for the home, where a neutral third party assesses its value. The lender wants to make sure your home is worth the amount of money they’re lending you for it to ensure that it’s a sound investment for them. If the home doesn’t appraise at the purchase price, it isn’t going to qualify for financing.
The financing contingency allows for you to get out of the contract if the home doesn’t appraise for the agreed-upon purchase price. You also have the option to negotiate with the seller to reduce the price of the home or come up with some other arrangement to satisfy this contingency.
As the buyer, it’s your responsibility to evaluate and test the property for potential problems at your own expense. This includes evaluating all elements of the home and its property, including major things like electrical, plumbing, the roof, and more. You can use any licensed professionals of your choice to so, and they may test and remove material from the property, if needed (but you’re responsible for any restoration needed afterwards).
You’ll have until the deadline in the contract to raise any problems with the seller by opening a Repair Addendum, where you can ask the seller to correct defects with the home (or compensate you accordingly). The seller may agree to everything, agree to it partially, or reject it altogether. You may continue to negotiate during this process. If you fail to resolve any objections with the seller, you’ve waived this contingency and are accepting the home as it is.
You can walk away at any time during the inspection period if you are unhappy with the report. But once that deadline has passed, you’ve accepted the home in its current state, warts and all.
Lead-Based Paint Contingency
Homes built before 1978 are highly likely to have lead-based paint inside somewhere. So, if the home was constructed before 1978, a lead-based paint disclosure is signed by buyer and seller. The buyer is responsible for having the home inspected for lead, and the buyer may cancel the contract if there are any lead-based paint hazards found in the home.
Seller Disclosure Contingency
Seller disclosures contain important information, direct from the seller, about the home and its condition, repairs, and renovations. As the buyer, you have five days after receiving this disclosures to revoke the purchase offer based on information contained in the disclosures. You can also end the purchase agreement any time before closing if you have not yet received the disclosures.
Title Insurance Contingency
The seller is responsible for contacting the title company, which will order a preliminary title report and any documents related to the home’s title. The seller needs to give you a good, marketable title to the home.
As the buyer, you should receive all of these documents and review them. It’s your responsibility to talk to the title insurance company about anything you don’t understand. You usually have five business days to notify the seller if you find anything that’s unacceptable in these documents.
Title issues aren’t common, but they can happen. You don’t want to have to fix title issues after you’re a new owner of the home.
The seller must also give you all documents related to an HOA, if applicable. You are also entitled to the Conditions, Covenants & Restrictions (CC&Rs) of any planned community—usually a condo or a townhome. These are due to you within seven business days of your accepted offer.
Make sure you look at rules carefully, because they can be very restrictive. Also, look for any evidence that the reserve fund of an HOA isn’t healthy, because that could be a red flag that you’re about to see a special assessment or a big HOA fee increase.
Other Oregon Contract Contingencies
Water Well Contingency
In properties where the water for the home is gotten from a well, this contingency allows the buyer to verify two things: 1) that the well produces enough water for the household and 2) that the quality of the water is safe for humans to consume. If the water well isn’t adequate for the household, you can back out of the contract.
Sale of the Buyer’s Home Contingency
You can make the purchase of your new home contingent on the sale of your old home. This can really help you if you don’t want to pay two mortgages at once.
You’ll be able to decide if you want to the contingency to be resolved when there’s an accepted offer on your old home, when there’s written approval of financing on your old home, or when the sale of your old home is actually closed.
You agree to do everything you can to sell your old home within a certain time period (30, 60, or 90 days is common). If the home isn’t currently listed, you’ll give a date for listing it.
In Portland’s current housing climate, this contingency can really weaken your offer, so take your agent’s advice when writing your contract!
Seller Home Purchase Contingency
The seller can make the purchase agreement contingent on them purchasing another home. This can happen in markets where there are not many homes available and the seller may have a tough time finding a new place to live after selling the old home to you. In fact, this contingency has been common in Portland in the past few years because it’s been so hard to find another house to purchase.
Keep the House on the Market Contingency
The seller can opt to keep the house on the market and continue to accept offers on it. This might happen in a situation when the buyer can only buy the new house if their old one is sold. In this case, the risk to the seller is that they will not sell their house AND have to give the earnest money deposit back to the buyer. The seller would have to re-list the home and receive no compensation for the failed deal.
A kick-out clause like this allows the seller to keep the home on the market and accept another offer that doesn’t have a contingency that the buyer must sell a home to buy the new one. The seller must notify the first buyer of a new offer and give them 72 hours to respond. The buyer can proceed without selling the first house or cancel the offer.
Have Any Questions about Contract Contingencies?
Contract contingencies can be a tricky business. If you have any questions, please get in touch! I’m here to help you figure out what will work best in your situation.
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