Common Real Estate Contingencies in California With Pros and Cons

When making an offer to buy a house in California, you have the option to include certain contingencies within your purchase offer.

Real estate contract contingencies give home buyers a way to back out of the deal if certain conditions arise, while protecting your earnest money deposit.

California Real Estate Contingencies for Home Buyers

A real estate contingency is a certain condition or situation that has to occur in order for the transaction to move forward.

If the contingency’s terms and specifications are not met, the home buyer can back out of the deal without losing any money. So it’s basically a contract escape clause.

Contingencies are optional in California. Home buyers can choose whether or not they want to use them. Some buyers include several contingency clauses, while others might only use one (or skip them entirely).

Here are some of the most common versions used by home buyers in California:

1. Home Inspection Contingency

When buying a home, you have the opportunity to inspect the property before purchasing. You can hire a professional inspector to review the house inside and out, and to provide you with a list of discrepancies or potential problems.

You also have the opportunity to include a home inspection contingency within your contract.

By doing so, you are making the sale contingent upon a satisfactory inspection. This allows you to back out of the deal if the inspector finds something you’re not comfortable with.

For instance, if the inspector discovers a serious problem with the roof, and the seller is unwilling to repair it, your home inspection contingency would allow you to exit the transaction.

More importantly, it could prevent you from losing your earnest money deposit.

2. Mortgage Financing Contingency

The mortgage financing contingency is another common purchase contract clause used by California home buyers.

As with the home inspection example above, this contingency allows buyers to back out of the transaction if a certain situation arises. Here, that situation relates to the buyer’s mortgage loan.

The financing contingency states that if the home buyer’s mortgage loan “falls through” prior to closing, they can terminate the contract and recover their deposit. These clauses usually include a timeframe as well, giving the buyer a certain period of time to obtain financing.

3. Home Appraisal Contingency

You can probably guess what a home appraisal contingency does for a buyer. It’s the same formula used in the previous examples, only this time it applies to a property appraisal.

In short, the appraisal contingency gives the home buyer a way to terminate the transaction if the property appraises for less than the agreed-upon purchase price.

If you’re using a mortgage loan to buy a house in California, the lender will likely order an appraisal to determine the home’s current market value. If the home appraises for less than the purchase price, it can complicate things.

In that scenario, the seller could reduce the sale price to reflect the appraisal, or the buyer could pay more out of pocket to make up for the difference.

That’s why some home buyers in California choose to include an appraisal contingency within their contracts. They do this to avoid paying more for a property than the appraiser says it’s worth, and to exit the transaction with deposit money intact.

4. Home Sale Contingency

The home sale contingency applies to people who are selling one home and buying another. In this scenario, the purchase contract contingency states that the buyer must sell their current home in order to purchase the new one.

It’s often wise to include such a clause. After all, most people in this situation need to use the proceeds from their home sale to put toward their next purchase.

If their current home does not sell, they might not have the money needed to purchase the next one. That’s the purpose of the sale contingency.

Protecting Your Earnest Money Deposit

Real estate contingencies used by California home buyers have certain things in common.

When buying a house, it’s customary for the buyer to make an earnest money deposit toward the purchase amount. This shows the seller that they’re serious about buying the house. Sellers prefer offers that include earnest money, for this very reason.

If the transaction moves forward, and the two parties eventually close the deal, the earnest money deposit gets applied to the home buyer’s down payment and/or closing costs.

But if the deal doesn’t go through, the earnest money deposit is at risk.

And that’s where contract contingencies come into play. If the buyer exits the transaction based on a situation specified in the purchase agreement (and there’s a contingency to cover it), they can usually recover their earnest money in full.

Potential Downsides and Disadvantages

The main risk of making a contingent offer in California is that the seller might not accept it.

Sellers tend to prefer non-contingent offers from buyers, because it gives them more certainty about the deal closing. From their perspective, contingent offers introduce an element of uncertainty.

The seller may be concerned that the deal could fall through if the buyer invokes contingencies, leading to additional time on the market and potential financial implications.

In a competitive seller’s market, where multiple offers may be on the table at once, sellers typically lean toward non-contingent offers for their perceived simplicity. As a result, buyers presenting contingent offers might find themselves at a disadvantage when competing for a property.

Consider Real Estate Market Conditions

As mentioned earlier, real estate contingencies in California are optional. Home buyers can choose whether or not they want to use them.

In some cases, a buyer might decide to waive all contingencies to make their offer more attractive to the seller. This strategy is often used in highly competitive real estate markets where sellers tend to receive multiple offers.

In a slower real estate market, where sellers might not receive as many offers, sellers are generally more willing to accept contract contingencies. This is especially true if a homeowner has been on the market for a long time without a successful offer.

So housing market conditions play an important role in all of this. Ultimately, however, only you can decide what kind of contract you’re comfortable signing. If you feel that a certain contingency is 100% necessary, then by all means include it.

Home buyers should consult with their real estate agents before using contingencies. An experienced agent will be able to tell you how likely sellers are to accept a contingent offer, based on local market conditions and negotiating leverage.

Five Things to Take Away from This Article

We’ve covered a lot of important information in this lesson, so let’s wrap up by summarizing the most important takeaways.

1. Real estate contingencies are clauses in a purchase contract that allow buyers to back out of a deal under certain conditions.
2. Common contingencies include home inspections, mortgage financing, property appraisals, and the sale of the buyer’s current home.
3. Contingencies protect buyers’ earnest money deposits by providing a legal basis for withdrawing from the deal.
   Waiving contingencies can make an offer more attractive to sellers, especially in competitive markets.
4. Market conditions influence the likelihood of a seller accepting a contingent offer.
5. Contingent offers offer protection but may make an offer less competitive as well.