Everything you ever wanted to know about including – or not including – contingencies in your Offer to Purchase Real Estate is probably covered in the answers to the questions below.

What are contingencies in an offer?

Contingencies in offers to purchase property relate to specific conditions which must be met by a specified time.  If the conditions aren’t met, the buyer has the right to walk from the deal and get back all his deposits.

Why do buyers put contingencies in their offers?

Contingencies protect buyers from situations that make it unacceptable or impossible to complete a purchase.  An example is a problematic home inspection or a rejected mortgage application. Since these situations don’t come into play until after you have an accepted offer, you have to allow for them – i.e. include contingencies – in your offer. If you have no problem with the conditions in the contingencies, you proceed to closing. If there is a problem with any of them, you can pull the plug on the purchase and get your deposit back.

What are the most common contingencies?

  1. Getting approved for a mortgage to purchase the property
  2. Having a satisfactory inspection
  3. Getting acceptable results from a lead paint test and/or a radon test
  4. For condominiums: satisfactory review of the condominium documents (i.e. master deed, declaration of trust, financials, rules and regulations, and condo meeting minutes)

How do you include contingencies in your offer?

The Greater Boston Real Estate Board (GBREB) and the Massachusetts Association of Realtors (MAR) provide forms which are typically used for making offers. The language in these forms has been approved by the Associations, and there are blanks for filling in the specifics of your offer.  There are forms for all the contingencies listed above.

What details are included in contingencies?

The blanks are filled in with the legal specifics of the contingency such as dates and dollar amounts. One might say that the inspection must be performed by a certain date, or that the cost of the problems found in the inspection must exceed $X. These details tighten up the contingency in order to protect the seller.  They prevent a buyer from waiting, for example, until the day before the closing date to say that they want to exercise the inspection contingency and get their deposit back.

What if you don’t put any contingencies in you offer?

If you don’t have any contingencies, you have no “escape hatch” to get out of the offer without losing your deposit as mentioned above. And what exactly are deposits? Typically, buyers put a security deposit in escrow (i.e. to be held by an attorney or broker) which goes to the seller if they buyer doesn’t perform. In recent years, the deposit has typically been of 5 – 10% of the purchase price in the Greater Boston Area. If you pull out of the transaction and are not protected by an applicable contingency (e.g. you pull out because you get rejected for a mortgage, but don’t have a mortgage contingency) you are not entitled to get your deposit back.

How do sellers feel about contingencies?

Of course, sellers understand why buyers want the protection provided by contingencies. On the other hand, when a buyer exercises a contingency, the seller is back at square one…he has to start marketing the property all over again. So the shorter the period for exercising the contingency, the less the seller minds it.  And the fewer contingencies, the better, as far as the seller is concerned. Accordingly, a buyer who wants to strengthen his offer without increasing the offer price, frequently will cut out contingencies.

When do buyers typically omit MORTAGE contingencies?

If buyers are planning to pay cash, a mortgage contingency is not applicable.  Similarly, if they want a mortgage, but can pay cash if they get rejected for the mortgage, then they have no need for a mortgage contingency.

When do buyers typically omit INSPECTION contingencies?

When someone buys a tear-down, an inspection is irrelevant.  If someone buys a condo that they have previously rented, they might not feel the need for an inspection. . If a buyer is very familiar with a particular subdivision, he might feel safe forgoing an inspection of a house in the subdivision.

 

When do buyers typically omit LEAD PAINT contingencies?

If the buyer expects that no children will be living in the property, there is no need for a lead paint inspection. If the property was built after 1978 when it became illegal to use lead paint there is no need for a lead paint inspection. Finally, if there are documents for the property certifying that it was tested for lead and none was found, there is also no need.

When do buyers typically omit RADON inspections?

In buying a house, buyers may be satisfied with an existing radon mitigation system. Or, they may feel that since the cost of a radon mitigation system is relatively modest compared to the cost of a house, (typically $1200 – $2000), they are not going to burden the offer with that contingency. In condos, the nature of radon comes into play. Radon is produced below ground and dissipates as it rises.  So, radon is considered an issue only in basement level units and those just above the ground. If a condo is on the second floor or higher, radon contingencies are usually considered unnecessary.

When do condo buyers typically omit CONDO DOCUMENT contingencies?

Many times, the agent or owner provides the condo documents together with the listing.  That lets the buyer review them – or have an attorney review them – before making an offer.

Should you leave out contingencies in competitive bidding situations?

In a hot market – such as we had not too long ago – there are typically many competitive bidding situations. And, in these situations, many buyers omit some –  or all – popular contingencies in an effort to make their offers more competitive. They frequently do so even if they they have no reason to believe that they are safe from the situations covered by contingencies. When  a buyer loses out on a number of properties in competitive bids, and he is under pressure to get into a new house, he may just throw caution to the wind and omit contingencies.

Of course, if a buyer takes that risk, he may find himself owning a house with tens of thousands, or even hundreds of thousands of dollars of structural problems. Or he may find himself with no mortgage and lose his 10% deposit.

There are no easy or clear cut answers for whether to omit contingencies when you are in a tough, competitive situation.  It is a very personal decision.  How risky is it to leave out each contingency in your particular case? And, how badly do want the house vs. how much risk are willing to take in an attempt to get the house? 

For more advice on making offers with and without contingencies, call Chris Kostopoulos at 857-829-0282 or email him at Chris@Isellmass.com

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