Contingencies are commonplace in real estate transactions, but they could derail a sale. These conditions in the contract specify when a buyer can back out without penalty. Thus property sellers need to know about the process of contingency removal.
As a seller, you need to understand your rights in the transaction. Otherwise, a canceled sale could cost you time and money. You could also lose out on other potential buyers who would be more ready to close on your property. This article will teach you the different processes of contingency removal. If you are planning to sell your home, read on to learn more.
Related: 15 Tips for Selling Your Home in 2021
Common contingency types
Buyers can include different contingencies in their offers. But there are three common types to watch out for:
This is also known as the due diligence contingency. Here, the buyer may hire a professional home inspector to examine the property onsite. It could also include inspecting the title and the homeowner’s association documents.
The inspection phase can last up to 14 days depending on both parties’ agreement. With this contingency, the buyer can back out of the sale for almost any reason. Also, any issues discovered during the inspection can extend the negotiations. The buyer can either request the seller to make the necessary repairs, or they can use the inspection report to negotiate for a lower selling price.
Related: House Inspection Cost in 2021: How Much Will You Pay?
Having an appraisal contingency in the contract allows the buyer to back out of the sale if the home appraisal is less than the agreed-upon value. The appraisal process usually takes place after the inspection. The appraiser must complete this process within 21 days after signing the contract.
With this contingency in place, the appraisal must meet or exceed the sales price. This could be an issue for you as a seller if your property ends up being appraised for lower than the contract price. If this happens, then you and the buyer must negotiate on who will cover the difference in the loan offered by the bank. Otherwise, the buyer can walk away from the sale without paying any penalties.
Related: When and Why Do You Need a Home Appraisal?
Loan contingencies apply to home purchases being made with a mortgage loan. This condition lasts for 21 days by default, but you as a seller can negotiate for a shorter period of time.
A loan contingency gives the buyer an option to cancel the contract without penalty if they are unable to get a mortgage loan approval. By the time the contingency expires, you would have already lost the opportunity to make a deal with a more serious buyer.
How to remove contingencies from the purchase agreement
You can still have an easy transaction by knowing about the process of contingency removal.
Removing inspection contingencies
One way to encourage your buyer to waive the home inspection contingency is to do a pre-listing inspection. This process is done before you put your property on the market. It highlights any issues so you can factor these in the price of your home and negotiate appropriately.
If you do a pre-listing inspection, be sure to provide potential buyers with the full report. Also, include which repairs you already made and which issues you left unresolved. You might still get some pushback from buyers as they may not trust an inspection that a seller paid for, citing potential conflict of interest. In this case, you can negotiate a short inspection period before the buyer is required to enact the removal of contingency. This is usually done by filling out the inspection contingency removal form.
Removing appraisal contingencies
Removing contingencies like appraisal and similar conditions would be easier if you sell to a cash buyer. Because they are not planning to get a loan from the bank, they are not required to get an appraisal done.
But if the only offers you are getting include this contingency, try to negotiate. If you are in a seller’s market, you might encounter a buyer who is willing to waive the appraisal contingency to make their offer more compelling.
If the appraisal is not done within the set time and the buyer has not applied the contingency removal, then you can issue them a Notice to Perform. This notice must be provided in writing with the buyer acknowledging receipt. With this document, they have 48 hours to either remove the contingency or cancel the transaction. If they have not done either of these things, then you can cancel the agreement and keep the earnest money deposit.
Removing loan contingencies
Removing loan contingencies is easy to do if you are in a seller’s market. In this case, the buyer would want to show that they are serious about purchasing to close the deal fast. They might even consider waiving mortgage contingency along with the loan.
In most states, loan contingency removal means that it is not included in the initial contract. But if it is part of your agreement with the buyer, then removal only happens once the buyer has secured financing for the property. Make sure that this contingency has an expiration date. If the date passes without the buyer canceling the contract, then they are obligated to purchase your home.
In California, the buyer must fill out a form to enact any contingency removal. This process includes signing a document called a contingency release agreement. With this form, you can keep the buyer’s earnest money deposit in case the transaction falls through.
Keeping contingencies out of the contract
Of course, the best contingency removal process is to keep them out of the purchase agreement in the first place. Here are some ways you can do that:
- Leverage the high demand for properties in your area. If the price of your home is competitive for your neighborhood, then you can negotiate the agreement in your favor.
- If you have multiple offers for your home, pick the one with fewer contingencies. This could mean having to accept a lower offer, but the potential stress that comes with these contingencies may be worth the price.
- Ask for cash offers. Buyers who are willing to pay in cash will not make you wait for appraisals or loan approval before they purchase your property. And if you did a pre-listing inspection, you could ask them to waive the inspection contingency as well.
- Include an escape clause. With this, you can continue to entertain and accept offers while the contingencies with your original buyer are ongoing. This will keep you from missing out on better opportunities to sell.
Selling property is easy with Mashvisor
Familiarizing yourself with contingencies should help you negotiate a better contract. You must also know about the contingency removal process so you do not lose any more time in selling your property. Asking your buyer to waive any contingency would make the transaction smoother as well. As long as you know your rights as a seller, you can close the deal on your house while minimizing other pesky processes.
When you are ready to sell, you can list your property on the Mashvisor Property Marketplace. On this platform, you can reach a wide range of serious buyers looking for a home just like yours. Start out your 7-day free trial with Mashvisor now!