I'm sometimes asked questions about a property by a prospective buyer to which the answer is not immediately known. Some of these questions can be quickly tracked down and answered but sometimes the type of question is best answered during an escrow. Getting a favorable answer to the question becomes a contingency of the sale. Most people are familiar with the type of contingency that requires a buyer's existing property be sold before being able to complete the purchase of a new property. This buyer makes an offer to a seller of a certain price contingent upon the sale of her/his existing property. However, there are other contingencies and not everyone is familiar with these.
There are inspection contingencies, for example. Standard inspections are pest (termite, mice, etc.), roof, septic and well. During escrow the buyer is encouraged to have all of these inspections conducted on the subject property; the buyer makes her or his purchase of the property contingent upon all of these inspections yielding favorable results.
If a person is buying into a property with a home owners' association she/he can make investigations in to the finances and running of the HOA and make a favorable finding a contingency of the purchase.
Another common sales contingency is where a buyer needs to obtain a loan to purchase the property and the sale is contingent upon the buyer obtaining financing. In a seller's market buyer's are encouraged to get pre-qualified for a loan so that when they find the property they want to buy they can jump right in knowing this hurdle is complete. In a buyer's market this is less important, but I do want to say that generally, it is a good idea to know how much house you can afford before you start looking or else you might end up disappointed. Another time that it is imperative to be pre-qualified is if you are in the foreclosure market; these places tend to move quickly and get multiple offers; often the seller requires all buyer's to be pre-qualified. Either way, if you aren't and you try to compete for a bank-owned property your offer will fall behind other offers with pre-qualifications.
Generally, if there is any type of question about a property that is not immediately answerable the buyer can make finding out the answer and being happy with the answer a contingency of buying the property. Alternately, the buyer may find out that the answer is not favorable and still decide to go ahead with the purchase. The price might be altered to reflect this decision. For example, if the roof needs replacing, the buyer might lower the offered price by the amount estimated to replace the roof; of course, the seller can then decide if he/she wants to take this revised offer. Another aspect of contingencies is that there is generally a time limit for conducting inspections, often 17 days; that allows the buyer to get the answers but also protects the seller's by keeping things moving along in a timely fashion.
I also get asked if a seller should take an offer with contingencies. This is a case-by-case situation, of course, but generally, inspection contingencies are normal and almost all sales will be subject to them. However, accepting the type of contingency whereby the buyer's ability to pay for the new purchase is contingent upon selling existing property is likely to be affected by the type of real estate market in effect at the time of sale. In our current market, where the average days on the market is around 200, a seller is less likely to want to take their property off the market while waiting for the buyer's property to sell.
Generally, many sales contingencies serve to protect the buyer from buying a property with unknowns; if you like a property a lot and want to purchase it, these contingencies should make you feel comfortable entering into escrow on a property knowing your questions and concerns will be answered and that if the answers aren't what you expect you can get out of the escrow at that point (so long as the inspection period is still valid). For many first-time buyers it seems scary to be making an offer to buy something you don't have all the answers to right away, but that's why we have escrow and inspections and contingencies.
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