Selling Your Home? Understand The Contingencies In The Buyer's Offer!

Considering selling your home?  Once your house is listed, you'll begin to have showings, and hopefully, receive a contract soon.  As you review the contract, pay close attention to the contingencies in the contract.  Ensure you are comfortable with these, as they will guide the entire selling process from start to finish.

FINANCING CONTINGENCY

When selling your home, one critical aspect to understand is the financing contingency in the buyer's contract.  This clause outlines the specifics of the loan the buyer is securing.  Since most buyers today rely on a mortgage, the financing contingency protects them if they cannot obtain a mortgage under certain terms.  If they are unable to secure the mortgage, they can withdraw from the deal without losing their earnest money deposit.  However, this means that your home will have been off the market for a significant period of time and will need to come back on the market.

To minimize potential issues, it's crucial to review and ensure the financing contingency is as clear and stringent as possible.  Here are come key points to consider:

• Loan Type:  Determine whether the buyer is getting an FHA loan, a conventional loan, a VA loan or paying cash.  Each loan type has different requirements regarding things like appraisals, well inspections, and more.
• Loan Terms:  Examine the length of the loan, the interest rate, and other conditions.
• Pre-Approval Match:  Verify that the loan terms in the offer align with those in the buyer's pre approval letter from their lender.
• Down Payment:  Assess the size of the down payment the buyer will be making.
• Flexibility:  Check if the buyer has the right to change the loan terms and/or lender between the contract acceptance and closing, provided it doesn't affect the settlement date.  
• Closing Costs:  Determine if the buyer needs the seller to cover any of their closing costs.

APPRAISAL CONTINGENCY

When a buyer is obtaining the loan, the lender will almost certainly require an appraisal of the property.  The contract gives the buyer the right to make the purchase contingent upon the property appraising for at least the purchase price.  Here's what happens in different appraisal scenarios:

1. Appraisal Higher Than Purchase Price:  If the property appraises for more than the purchase price, the seller won't be informed, and the sale proceeds as planned.
2. Appraisal Lower than Purchase Price:  If the property appraises for less than the purchase price, several options are available:
• Price Reduction Request:  The buyer can request a reduction in the purchase price to match the appraised value.  To do this, the buyer must provide the seller with a copy of the appraisal and make the request within five days of receiving the appraisal.
• Paying The Difference:  The buyer can choose to move forward with the purchase and pay the difference between the purchase price and the appraised value at closing.
• Contract Termination:  If no agreement can be reached the buyer has the option to terminate the contract.
• Negotiation:  The buyer and seller can negotiate to split the difference, with the seller reducing the price and the buyer bringing additional funds to closing.

The appraisal contingency is a crucial part of the contract as it ensures the property is valued at or above the purchase price, protecting the buyer from overpaying.  By understanding and carefully considering this contingency, both buyers and sellers can navigate the appraisal process more effectively.

COMMON INTEREST COMMUNITY DISCLOSURE (OR HOMEOWNERS ASSOCIATION)

If you're selling a home in a neighborhood with a Homeowners Association (HOA), your property falls under the Virginia Resale Disclosure Act.  This contingency gives you the buyer a chance to review the HOA's rules, fees and financial health.  As the seller, you're required to order this resale package from your HOA and provide it to the buyer for their assessment.

Here's how it works:

• Ordering the Resale Package: As the seller, you must obtain the package from your HOA.  This package includes essential information about the association as specified by law.
• Buyer's Review Period: Once the buyer receives the resale package, they have three calendar days to review it.  During this time, they can decide whether to proceed with the transaction.
• Buyer's Right To Cancel: The buyer has the right to cancel the contract within these three days without providing a reason.  If they choose to terminate the contract within this timeframe, they will not lose their earnest money deposit.

To facilitate a smooth process, I recommend sellers order an email copy of the HOA package as soon as their home is listed.  This way, it's ready to be forwarded to the buyer's agent promptly, allowing the three day review period to begin as soon as possible.

By understanding and adhering to the Virginia Resale Disclosure Act, you can help ensure a smoother transaction and provide the buyer with the necessary information to make an informed decision.

PROPERTY INSPECTION CONTINGENCY

When buying a home, a buyer has the option to skip the home inspection and purchase the house "as is" or opt for a professional home inspection.  This inspection, conducted by a licensed home inspector hired by the buyer, thoroughly assesses the condition of the home.  The duration of the inspection varies, depending on the size of the property, often taking several hours.

During the inspection, the inspector examines both the interior and exterior of the house, including the HVAC system, structure, plumbing, electrical systems, roof, chimney, appliances, and checks for radon, among other things.  Afterward, the inspector provides the buyer with a detailed report highlighting all defects, both minor and major as well as the ages of some of the systems such as the HVAC system.  In the Richmond area, this report typically includes estimated repair costs for each issue.

Based on the inspection report, the buyer has several options:  they can choose not to request any repairs, ask the seller to address all defects before closing, request that only some defects be fixed, or negotiate a credit from the seller at closing instead of repairs.  This negotiation process is crucial and can lead to various outcomes.  If the buyer and seller cannot reach an agreement within the negotiation period, the buyer has the right to terminate the contract and receive a refund of their earnest money deposit.

SALE OF EXISTING HOME CONTINGENCY

While it can be challenging to get an offer accepted that includes a home sale contingency, it's certainly no impossible.  For buyers looking to move up and needing to sell their current home to purchase a new one, they might include a First Right Contingency in their offer.  This contingency adds an extra layer to the standard offer terms like price, appraisal and inspection.

The First Right Contingency addendum specifies that the purchase of the seller's home depends on the sale of the buyer's current home.  As a seller, you need to carefully evaluate the details of this addendum, which includes:

• Timeframe: When the buyer's house will be listed for sale and how long they have to sell it to remove the contingency.
• Backup Offers: The process if the seller receives another offer they prefer and want to accept.
• Loan Application: when the buyer will formally apply for a loan with their lender.
• Inspections: When the buyer will conduct all inspections of the seller's house.
• Settlement Date: The planned date for settlement on the seller's house.
• Contingency Removal: The conditions that need to be met for the buyer to remove the contingency.
• Contract Termination: The date the contract between buyer and seller will end if the buyer does not sell their current home.

Understanding and negotiating these terms carefully can help both parties navigate the complexities of a home sale contingency.

TITLE CONTINGENCY

When selling a property in Virginia, unless it is a foreclosure, or an estate sale, the Seller is typically required to convey the property via a general warranty deed.  This is the standard method for property transfers in Virginia.  To ensure this type of conveyance, an attorney or title company will perform a search of public records to verify the rightful owner of the property and their authority to sell it.  This search also identifies any liens or encumbrances that could affect the title and the buyer's ability to purchase the property.  

Although rare, errors can occur in recorded titles, or previous liens might not be released.  Sellers might be unaware of these lingering claims on the title.

If any issues are discovered during the title search, it is crucial to address them promptly.  Your title company or attorney can help resolve any discrepancies.  To prevent title issues from delaying your closing, I recommend selecting a settlement attorney as soon as you list your house.  Ask them to conduct an initial title review to identify and resolve any potential problems early on.  If title defects are found and not corrected by closing, it could delay or even prevent the sale.  

INSURANCE CONTINGENCY

An insurance contingency mandates that the buyer procure homeowners insurance for the home they are purchasing, ensuring adequate coverage against future risks.  Given the rising trend of insurance premiums and stricter criteria from insurers in 2024, many buyers are now incorporating Homeowner Insurance contingencies into their offers.  These contingencies stipulate that the offer is dependent on the buyer's ability to obtain insurance at a reasonable rate.

Even in regions like ours, which are not prone to climate-related disasters such as hurricanes or wildfires, insurance companies are increasingly scrutinizing properties.  They may request copies of home inspection reports or inquire about the age of the roof before issuing policies.  In cases where insurers find issues or deficiencies in critical systems like HVAC, water heaters, or plumbing, they may demand replacements or repairs as a condition for providing coverage to the buyer.

Furthermore, insurance companies have been known to adjust their pricing quotes shortly before the closing date.  This last minute change can significantly increase the buyer's monthly payment, potentially prompting them to reconsider their purchase or negotiate new terms.

These developments underscore the importance for buyers and sellers to carefully navigate insurance contingencies in real estate transactions.  By staying informed about insurance requirements and potential pitfalls, parties can better manage expectations and ensure smoother closings.  

There are numerous contingencies that a home buyer can include in a contract. Reviewing offers thoroughly with your Realtor is essential to fully comprehend all contingencies.  This ensures a smoother transition from contract to closing, minimizing stress and facilitation progress toward your next chapter!