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Common Real Estate Contract Contingencies in California

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.

In this article, we will examine some of the most common contingencies used by buyers in California. These include clauses relating to the property inspection, the appraisal, mortgage financing, and the sale of the current home.

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 terms and specifications are not met, the home buyer can essentially back out of the deal without losing any money. (As long as the contract clause is worded appropriately.)

Contingencies are optional. Home buyers in California can choose whether or not they want to use contingencies, and which ones are most important to them. Some buyers include several, while others might only use one contingency or skip them entirely.

We’ll talk more about waiving real estate contract contingencies in a moment. For now, let’s look at some of the most common clauses 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 home inspector to review the house inside and out, and to provide you with a list of discrepancies or issues.

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 problems with the roof, and the seller is unwilling to repair it, your home inspection contingency will allow you to exit the transaction. More importantly, it could protect 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 has to do with mortgage financing.

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

At this point, 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. And if the home appraises for less than the purchase price, it can complicate things. In that scenario, the seller could reduce the sale price, 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. And that’s where the home sale contingency comes into the picture.

Protecting Your Deposit

Real estate contingencies used by California home buyers have certain things in common. For one thing, they allow the buyer to back out of the deal if a certain situation arises. They also protect the buyer’s earnest money deposit.

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 tend to prefer offers that include earnest money, and for this very reason.

If the transaction moves forward, and the two parties eventually close the deal, the earnest money deposit gets applied to 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 without losses.

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, they’re 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 do play a role in all of this. Ultimately, however, only you can decide what kind of contract you’re comfortable signing. If you feel it’s 100% necessary to include a certain type of contingency, then by all means do so. Just know that contingencies can affect the way a seller views your offer.

Mike Trejo

Mike Trejo is a Bay Area mortgage broker with 20+ years of knowledge and experience.

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