Homebuyers must protect themselves and their investment – specifically, their earnest money deposits – by including contingencies in their real estate contracts.
Home-buying contingencies are legal clauses that allow homebuyers to back out of a contract or negotiate further if certain conditions are not met or significant issues are uncovered.
The following are some common contingencies to consider including in a Massachusetts purchase contract and a purchase and sale agreement:
- Financing contingency: The financing contingency or mortgage contingency allows homebuyers to back out of the contract if they fail to secure financing for the home by the mortgage contingency or loan commitment deadline. A mortgage contingency protects homebuyers in case their loan falls through for any reason. Without a financing contingency, the homebuyer would be legally obligated to buy the house, even though you don't have the money to do so. If the homebuyer doesn't purchase the home, they would likely lose their earnest money deposits.
- Home inspection contingency: The home inspection contingency gives the homebuyer the right to hire a licensed home inspector to inspect the property. If the inspection reveals any significant issues with the home, the buyer may back out of the contract. With a home inspection contingency, you also can negotiate with the seller regarding problems found that need fixing before the sale is finalized. Alternatively, a seller might agree to a price reduction or what is referred to as a seller concession or buyer credit.
- Appraisal contingency: The appraisal contingency protects the homebuyer if the home's appraised value is lower than the agreed-upon purchase price. If the appraisal comes in lower than the agreed-upon purchase price, you can either move forward, attempt to renegotiate the price, or back out of the contract. A low appraisal could result in a homebuyer no longer qualifying for a mortgage, making the mortgage contingency critical. An appraisal is a professional assessment of the value of a home. A licensed appraiser with training and experience in determining the value of homes conducts the appraisal. A homebuyer's real estate buyer agent should perform a comparative market analysis to help determine the home's fair market value before the buyer makes an offer.
- Title contingency: The title contingency ensures that the seller has a clear title to the property and can legally sell it to the buyer. Sometimes there are issues with the title, such as outstanding liens or unresolved disputes. The title contingency allows a homebuyer to back out of the contract or require the seller to rectify the defective title before the closing. A homebuyer should strongly consider purchasing title insurance to protect themselves from title defects that might be discovered after the closing.
- Condominium contingency: A condominium contingency allows the buyer to back out of the contract if the condo documents or financials reveal unanticipated issues. The problems may include, among other things, the homeowner's association holding significant debt or a lot of uncollected condominium fees. In addition, the condo association rules might not appeal to the buyer.
- Title 5 (Septic) Contingency: Title 5 is a Massachusetts law that regulates the installation and maintenance of on-site sewage disposal systems, including septic systems. Septic systems are regularly found in rural areas with no access to public sewage systems. In Massachusetts, it is typical for a seller to repair or replace a septic system that doesn't meet state and local requirements before closing if the contingency is in place. Including a Title 5 contingency in a contract to purchase or purchase and sale agreement is essential because septic systems can be costly to repair or replace.
- Home sale Contingency: A home sale contingency gives the homebuyer the right to back out of the contract if their current home does not sell. Such a contingency is vital because a buyer may need the proceeds from the sale of their existing home to fund the purchase of their new home. It's important to note that a home sale contingency is not always a deal breaker for sellers. Some sellers may be willing to wait for the buyer's current home to sell before moving forward, especially if the buyer's offer is competitive.
- Other home-buying contingencies: Besides the contingencies discussed above, there may be other contingencies a real estate buyer will need to include in a purchase contract to a homebuyer's interests. For example, a purchaser of a multi-family home may want the premises free of tenants at the time of closing. Someone buying a newly constructed home will want to see a certificate of occupancy from the local city or town building department. If a deceased person's estate sells a home, the contract will be contingent on the estate's executor obtaining a license to sell.
Homebuyers might want other contingencies included in their contracts depending on the circumstances and particular property. That's where professional advice is valuable, assessing what additional contingencies are necessary.
Homebuyers should not confuse the contingencies above with a listing on the multiple listing service being listed as contingent. A contingent listing refers to a property on the multiple listing service where the seller has accepted an offer.
It's essential to work with a competent, loyal real estate buyer agent and experienced real estate attorney to ensure the above home-buying contingencies are included in your contracts when necessary and to understand the specific terms and conditions of each one. With these contingencies, you can protect yourself and your deposits and ensure you get the home you bargained for while protecting yourself financially.