What are contingencies?
If you want an easy way to remember and understand this handy buyer’s tool in the sea of confusing real estate terminology, consider a contingency to be a hinge. Your contract hinges on your mortgage getting secured; your deal hinges on the sale of another property; your contract hinges on an appraisal that proves the home is worth its price. The length of each contingency (e.g. "7 day inspection contingency") is the deadline that the buyer has to cancel or renegotiate the offer contract for that hinge.
There are 3 major contingencies to consider when making an offer. Sellers will always favor offers with fewer and shorter contingencies because without contingencies, and after the contingency deadlines, the buyer cannot back out of a transaction without losing their deposit.
Inspection Contingency – This gives the buyer the right to get the home inspected. During the inspection contingency period, you will hire a professional to inspect the property and review all disclosures. Start with a general inspection, and then follow up with more specific inspections if repairs are needed or major issues are found.
Appraisal Contingency – An appraisal contingency is when a third party (who is usually hired by the buyer's lender) evaluates the fair-market value of the home. In the instance the appraised value is less than the sale price, the appraisal contingency lets you back out of the deal.
Loan Contingency – If the buyer’s financing falls through, he or she is allowed to cancel the entire deal without needing anyone’s permission and without penalty. Buyers are usually required to apply for financing within a specified time after signing the contract.
Home Sale Contingency – The purchase of this property is dependent on the successful sale of another piece of real estate, i.e. the buyer must sell their home in order to finance a new one.