Let’s Explore the role of Contingencies in a Real Estate Transaction in California
What’s a contingency? In the formal definition, a contingency is “a provision for an unforeseen event or circumstance.” In real estate, this means that the offer is contingent on a certain matter happening — it will happen only if all requirements are met.
For example, let’s say we have a house listed at $1,000,000 and we have an interested buyer. The market is hot right now, so they offer the full list price of $1,000,000. Great! However, there are a few contingencies attached to the offer — basically saying “we will give you $1,000,000 for this house, but ONLY IF certain conditions are met.” Now, what are the conditions that often accompany an offer? We will discuss the three main ones — appraisal, inspection, and loan. Let’s dive into each one individually below!
An appraisal contingency is very reasonable and protects the buyer (as do all contingencies) in the case that the house actually appraises at the correct value. The buyer, through the loan company’s closing costs, must pay for an appraiser to inspect and write a report on the home’s value. In our example, we have a list price of $1,000,000, so the seller hopes that the appraised value is $1,000,000 or higher. Let’s say it appraises right at $1,000,000 — the seller is happy, the buyer is happy, and the contingency check-box is checked. At this point, the buyer signs a form to remove that contingency from the offer.
Though the appraiser does go to the house, they are not a home inspector, so they aren’t the ones that are putting together an inspection report. This is what the buyer would need to lift the inspection contingency. A Home Inspection entails a lot of subjects but for now, let’s just say an Inspector comes in to take a look at the house and make a general report on the condition. They are not an electrician, plumber or roof specialist but the report can contain recommendations to use a specialist in an area that the Home Inspector feels should be looked at closer. In a future blog I will cover the Home Inspection Process.
This contingency is exactly what it sounds like — a contingency for the buyers getting loan approval from their bank or a mortgage broker. This one is absolutely crucial for the deal going through. Though the contingencies all are equal on the contract, people are more likely to waive the appraisal contingency than they are to come up with $1,000,000 cash. Most people don’t have that in their savings account! If for some reason, the lender will not approve the loan, the deal is often dead in the water — the sellers will have to select a different offer, with more stable financing. This is why cash offers are so highly prized: because the seller knows that there will be no issue with financing/loans.
Robert Schmalz - Broker / Founder
West Los Angeles Real Estate Group
An Independent California Licensed Realty
California Broker Lic #01813025
"Helping Guide Clients Through The Economic Complexities Of Real Estate
By Knowing Their Wants And Needs"