A well-written contingency will provide first-time homebuyers with peace of mind to confidently purchase a house on their own terms. After all, contingencies are put in place to avoid the potential pitfalls associated with buying a home. A majority of investors and first-time homebuyers, not excluding myself, have made the execution of popular contingencies common practice in situations that call for them. Contingencies have saved me from acquiring ill-suited properties on more than one occasion. That said, I will never advise against the use of a necessary contingency; I only ask that you mind your due diligence and consider what the addition of a contingency may mean to a seller.
Far too many first-time homebuyers are unaware of the ramifications that have become synonymous with the use of contingencies. While beneficial in more ways than you can imagine, contingencies are not without their drawbacks. Use them sparingly; just because you can doesn’t mean you should.
There are certain guidelines, unspoken rules if you will, to abide by when negotiating contingencies upon making an offer. Let’s take a look at a few of the most important rules first-time homebuyers should follow when considering whether or not to implement a contract contingency:
Contingency Rules For First-Time Homebuyers
Contingencies are tailor-made for the typical first-time homebuyer. However, few are even aware they exist, not to mention what they actually do. That said, I would be remiss if I didn’t at least clear the air: Contingencies, otherwise known as stipulations, are essentially clauses added to a contract that will allow the participants of a deal to back out without reprimand in the event predetermined circumstances are met — or not met. Not surprisingly, they are often exercised by those who aren’t 100% ready to commit to a property. First-time homebuyers, on the other hand, typically implement contingencies to make up for their inexperience.
Contingencies are not all that dissimilar from real estate negotiations. In fact, you could argue that they are one in the same. Nonetheless, I must stress the importance of both parties agreeing to a respective contingency. Remember, it takes two happy sides to take a deal to the closing table. The seller needs to be aware that contingencies are merely a safety measure exercised by buyers, and buyers need to recognize that contingencies are essentially an additional obstacle in the transaction.
The sooner first-time homebuyers learn to navigate contingencies, the better off their offers will be. Let’s take a look at a few of the rules I recommend consulting prior to exercising any contingencies of your own:
1. Consider The Seller’s Perspective
Contingencies are, without a doubt, a great asset for any homebuyer to have at their disposal, let alone anyone trying out their first real estate investment strategy. Not only that, but contingencies become more relevant with the less experience you have. They are, after all, a way for unsuspecting buyers to retreat from a poor deal.
Negotiated properly, contingencies are entirely capable of allowing otherwise ignorant first-time homebuyers to back out of a potentially crippling transaction. However, while the benefits are well-documented, they are not without an inherent degree of cautious optimism. If for nothing else, every transaction requires the cooperation of two or more parties, and sellers aren’t likely to view contingencies with the same enthusiasm.
Sellers do not view contingencies in the same light as buyers, but rather as an additional obstacle preventing them from doing the one thing they desire most: close a deal. Regardless of the circumstances, sellers are likely to view the addition of a contingency as a liability. That said, for as important of a role contingencies can play in a transaction, you must look at it from the seller’s perspective. In reality, contingencies are nothing more than an escape clause; one that can result in the loss of a sale.
As a first-time homebuyer, consider the ramifications of any contingencies you may want to negotiate. Refrain from asking for any contingencies that are not absolutely necessary, as the more you add, the more likely sellers are to discredit your offer. Consequently, the fewer contingencies, the more attractive your offer is likely to be.
I am certainly not advocating the absence of contingencies from every first-time homebuyer’s offer; only suggesting that you carefully consider the ones you do decide to follow through with. More often than not, contingencies are integral to the process, at least for those who are looking to avoid catastrophe. That said, you should only include contingencies that are absolutely necessary to protect your interests.
2. Limit Your Offer To A Single Contingency
In the event you are convinced a contingency is absolutely necessary, don’t go overboard. While it may be reassuring to front-load your offer with multiple exit strategies, the seller may not appreciate your methodology. That said, limit your contingencies to one per offer; anything more will raise a red flag.
Below you will find a list of the most common contingencies used by first-time homebuyers:
- Financing Contingency: Offers are contingent on whether or not the proper real estate financing can be secured. Some contingencies may account for alternative real estate financing options as well.
- Appraisal Contingency: Offers are contingent on whether or not the appraised value is at leas as high as the agreed upon purchase price.
- Selling Contingency: Gives buyers the option to back out of a deal if they can’t sell their current residence.
- Mold Contingency: Offers are contingent on whether or not the home has been found to have mold.
There are literally countless contingency options available to first-time homebuyers, but that doesn’t mean you should exercise your right to use them all, or even more than one.
I am convinced that a single contingency is more than enough to provide you with the protection you need on a respective real estate deal. There is, however, one contingency I am more prone to using than perhaps any other: the inspection contingency. Not surprisingly, inspection contingencies are put in place to protect buyers from homes that don’t pass inspection. For starters, inspections can tell you a lot about a home. Trained professionals can identify any flaws that may warrant your withdrawal from the property. Provided they uncover a serious problem, it is in your best interest to back out of a deal. Why wouldn’t you?
However, inspection contingencies offer a lot more than peace of mind; they award savvy first-time homebuyers more time. Typically, a home inspection can add somewhere in the neighborhood of 10 days onto a sale, providing buyers with enough time to get everything in order. Use this time to make sure everything is as it should be. If done correctly, an inspection contingency should be all you need to close a deal, and the seller will certainly appreciate the absence of more contingencies.
3. Contingencies Are Entirely Negotiable
More often than not, buyers view contingencies as a means of retreating from a poor deal. However, contingencies are entirely capable of keeping a deal alive as well. In the event a deal isn’t going the way you had initially hoped, or you come across a concerning issue, contingencies can reopen negotiations with a respective seller.
If, for instance, an inspection uncovers a problem that is readily fixable, there is no reason you can’t use your contingency to negotiate a price drop on the home that is equal to the amount it would cost to fix said issue. Don’t, for one second, think that you have to back out of a deal because of a minor problem; reserve acting on your contingencies for serious problems. Minor ones that can be fixed may allow you to negotiate a better deal on the home.
Let’s say your home inspection uncovers some questionable plumbing that may cost somewhere in the neighborhood of $5,000 to fix. Instead of backing out of the deal, it is reasonable to suspect the seller would drop the price of the home by the same amount it would cost to fix the problem. Don’t neglect to use contingencies to your advantage.
More so than perhaps any other demographic, contingencies award millennials and first-time homebuyers a peace of mind that few things can offer. However, they need to be used sparingly, as sellers view them as a red flag. Do yourself a favor and only implement contingencies that are absolutely necessary.