For Sellers April 7, 2022

Common Real Estate Contingencies

Contingencies help to spell out the specifics of a real estate transaction by dictating what must happen so the contract becomes legally binding. If certain conditions aren’t met, the applicable contingency gives the buyer and the seller the right to back out of the contract per their agreed-upon terms. When selling your home, a buyer may make their offer with contingencies attached. Here are some common contingencies you might see in a buyer’s offer and what they mean for you.

Common Real Estate Contingencies

Home Inspection Contingency

A home inspection contingency allows the buyer to have the home professionally inspected within a certain window of time. If the buyer finds outstanding repairs that need to be made, they can negotiate them into their offer. If the seller chooses not to make the repairs outlined in the buyer’s home inspection report, the buyer can cancel the contract.

As a seller, it’s important to be transparent in listing any issues with the home. This is why many sellers find a pre-listing inspection to be beneficial: it provides transparency about the home’s condition ahead of time and can help to streamline the buying process, which can be especially helpful when selling in competitive markets.

Financing Contingency

Also known as a “mortgage contingency,” a financing contingency gives the buyer a specified period of time to secure adequate financing to purchase the home. Even if a buyer is pre-approved for their mortgage, they may not be able to obtain the right loan for the home. If they are unable to finance the purchase, the buyer can back out of the contract and recover their earnest money, and the seller can re-list the home.

The seller won’t be on the hook if the buyer fails to cancel the contract. Even if the buyer is not able to secure financing by the agreed-upon date, they are still responsible for purchasing the home if they do not terminate the contract.

 

A man and a woman review their real estate contingency paperwork for the sale of their home.

Image Source: Getty Images – Image Credit: fizkes

 

Appraisal Contingency

An appraisal contingency states that the home must appraise for, at minimum, the sales price. It protects the buyer in that it allows them to walk away from the deal if the property’s appraised value is lower than the sales price, and typically guarantees that their earnest money will be returned. This can be an issue in certain markets where demand is driving prices up to numbers that appraisals don’t reflect. Depending on the agreement you make with the buyer, you may be able to lower the price of your home to the appraised amount and sell it at that price. When selling your home, remember that there is a difference between appraised value and market value. An appraiser’s value of a property is based on several factors using comparative market analyses, whereas market value is what buyers are willing to pay for a home.

Home Sale Contingency

If a contract includes a home sale contingency, it means that the buyer is tying their purchase of a home to the sale of their existing one. Though it is common for homeowners to buy and sell a house at the same time, attaching a home sale contingency to an offer does create some added variability in a real estate transaction that sellers should be aware of before accepting such an offer. This contingency allows buyers to sell their current home and use the proceeds to finance the purchase of their new one. Although you will have the right to cancel the contract if your buyer’s home is not sold within a specified time, you’re still waiting on them for the deal to go through, which means you could potentially miss out on other offers while you wait.

Title Contingency

Before the sale of a home goes final, a search will be performed to ensure that any liens or judgements made against the property have been resolved. A title contingency allows a buyer to raise any issues they may have with the title status of the property and stipulates that the seller must clear these issues up before the transfer of title can be complete. If an unpaid lien or unpaid taxes turn up in the home’s title search, this contingency also allows the buyer to back out of the deal and look for another home. A majority of sellers will pull a pre-title report to provide transparency for a smooth transaction.

These are just some of the contingencies you may encounter in a buyer’s offer. Work closely with your agent to understand the terms of these contingencies and how they impact the sale of your home as you go about finding the right buyer. For more information on the process of selling your home, read our blog post on common mistakes to avoid:

7 Mistakes to Avoid When Selling a Home

Colorado Housing June 5, 2019

To Sell or to Rent? The Perks and Pitfalls of Being a Landlord

Posted in Selling by Kenady Swan 

Electing a full sale or a property management situation is a life-changing decision that shouldn’t be taken lightly. In choosing whether or not becoming a landlord is right for you, there are a number of factors to consider, but primarily they fall into the following three categories: financial analysis, risk, and goals.

 

The financial analysis is probably the easiest of the three to perform.  You will need to assess if you can afford to rent your house. If you consider the likely rental rate, vacancy rate, maintenance, advertising, and management costs, you can arrive at a budget. It is important to both be detailed in your projections and to have enough reserves to cover cash-flow needs if you’re wrong. The vacancy rate will be determined by the price at which you market the property.  Price too high and you’re liable to be left vacant. Should you have applicants, they’ll often be a group that for some reason couldn’t compete for more competitively priced homes. Price too low and you don’t achieve the revenue you should. If you want to try for the higher end of an expected range, understand that the cost may be a vacant month. Any way you slice it, it’s difficult to make up for a vacant month.

 

Consider the other costs renting out your property could accrue. If you have a landscaped or large yard, you will likely need to hire a yard crew to manage the grounds. Other costs could increase when you rent your home, such as homeowner’s insurance and taxes on your property. Depending on tenant turn-over, you may need to paint and deal with maintenance issues more regularly. Renting your home is a decision you need to make with all the financial information in front of you.

 

If your analysis points to some negative cash-flow, that doesn’t necessarily mean renting is the wrong option. That answer needs to be weighed against the pros and cons of alternatives. For instance, how does that compare to marketing the property at the price that would actually sell? Moreover, you’ll need to perform additional economic guesswork about what the future holds in terms of appreciation, inflation, etc. to arrive at an expectation of how long the cash drain would exist.

 

Risk is a bit harder to assess. It’s crucial to understand that if you decide to lease out a home, you are going into business, and every business venture has risks. One of the most obvious ways of mitigating the risk is to hire a management company.  By hiring professionals, you decrease your risk and time spent managing the property (and tenants) yourself.  However, this increases the cost. As you reduce your risk of litigation, you increase your risk of negative cash-flow, and vice versa… it’s a balancing act, and the risk cannot be eliminated; just managed and minimized.

 

 

In considering goals, what do you hope to achieve by renting your property? Are you planning on moving back to your home after a period of time? Will your property investment be a part of your long-term financial planning? Are you relocating or just hoping to wait to sell? These are all great reasons to consider renting your home.

Keep in mind that renting your family home can be emotional. Many homeowners love the unique feel of their homes. It is where their children were raised, and they care more about preserving that feel than maximizing revenue. That’s ok, but it needs to be acknowledged and considered when establishing a correct price and preparing a cash flow analysis. Some owners are so attached to their homes that it may be better for them to “tear off the band-aid quickly” and sell. The alternative of slowly watching over the years as the property becomes an investment instead of a home to them may prove to be more painful than any financial benefit can offset.

 

Before reaching a conclusion, it’s a good idea to familiarize yourself with the landlord-tenant-law specific to your state (and in some cases, separate relevant ordinances in the city and/or county that your property lies within) and to do some market research (i.e. tour other available similar rentals to see if your financial assumptions are in line with the reality of the competition across the street). If you are overwhelmed by this process, or will be living out of the region, seek counsel with a property management professional.  Gaining experience the hard way can be costly. With proper preparation, however, the rewards will be worth it.