Well, I hate to break it to you, but buying a home isn’t like buying a pair of jeans. If you buy a pair of jeans, get home, try them on again, and then decide that you hate them, it’s usually no big deal. You just take them back to the store for a full refund.
But that’s not how it works when you buy a home. There are no refunds once that sale is final. You’re now responsible for everything in that home. But does this mean you’re stuck as soon as you have an accepted offer?
Well, thankfully, no. This is what contract contingencies are for. They give you a way out of the contract with no penalty if certain situations arise. They are vitally important for preventing a wide variety of bad situations, so it’s important to know about them and how they can protect you.
How do Contingencies Actually Work?
Contingencies are items that must be met before the purchase of the home is final. So, if something happens, the buyer can cancel the contract AND receive earnest money back. Earnest money is the percentage of the purchase price you put down (usually 1 to 2%) when you have an accepted purchase contract.
During the time between the signing of the purchase contract and the home’s closing, both parties should be working to satisfy these contingencies. There may be dates set for certain contingencies after which there would be repercussions for backing out of the contract (like forfeiting earnest money).
So, how many contingencies can you add to a purchase contract? As many as you want (the more you add, the safer you are from unexpected problems). But be aware that the seller may not agree to all of the conditions you ask for. In hot markets like ours, too many contingencies makes it less likely that your offer will be accepted.
Additionally, there may be situations when the seller proposes a contingency or two that you will have to agree to in order to move forward with the deal.
Most Common Utah Contingencies
Every Utah real estate contract makes it easy to have the most important contingencies that every contract should have—you just have to check a few boxes in the contract.
Due Diligence Contingency
Due diligence means that, as the buyer, you’ll do everything you can to evaluate and test the property for potential problems. This includes evaluating its physical condition, as well as looking for hazardous substances, environmental issues, and the condition of the home’s major systems. You should also verify square footage and land acreage. All inspections, tests, and checks are paid for by the buyer (unless otherwise noted).
The home inspection, which looks for problems with the home, is part of this due diligence process. If you find that the home has foundation problems or a bad roof, you’ll have the option to walk away or see if you can work out some kind of concession from the seller that would allow you to move forward with the purchase.
You’ll have until the deadline to raise any problems with the seller and negotiate a solution. If you fail to resolve any objections with the seller, you’ve waived this contingency and are accepting the home as it is.
Home Appraisal Contingency
A neutral third party will appraise your home (this is something that will be ordered by your lender). The lender wants to make sure that your home is worth the amount of money they’re lending you for it to make sure it’s a sound investment for them.
If the appraisal value is less than the purchase price, a lender will often not approve the loan. This contingency allows for you to get out of the contract if the home doesn’t appraise for the agreed-upon purchase price. (You can also negotiate with the seller to come up with a resolution to this problem.)
If you’re unable to get approved for a loan, you can cancel the purchase agreement. Without this important contingency, you might be stuck with a home that you can’t pay for. Unfortunately, loans aren’t guaranteed until they’re final. If your loan falls through at the last minute, you’ll be protected.
There’s also a clause in the Utah purchase contract that allows you the opportunity to cancel the contract if you’re not satisfied with the terms of the loan, including the interest rate. This gives you a lot of power as a buyer.
Other Utah Contract Contingencies
There are some other, less-common contingencies that you or the seller may want to put into the contract.
Sale of the Buyer’s Home Contingency
You can make the purchase of your new home contingent on the sale of your old home. This can really help you if you don’t want to pay two mortgages at once.
You’ll be able to decide if you want to the contingency to be resolved when there’s an accepted offer on your old home, when there’s written approval of financing on your old home, or when the sale of your old home is actually closed.
You agree to do everything you can to sell your old home within a certain time period (30, 60, or 90 days is common). If the home isn’t currently listed, you’ll give a date for listing it.
Seller Home Purchase Contingency
The seller can make the purchase agreement contingent on them purchasing another home. This can happen in markets where there are not many homes available and the seller may have a tough time finding a new place to live after selling the old home to you.
Keep the House on the Market Contingency
The seller can opt to keep the house on the market and continue to accept offers on it. This might happen in a situation when the buyer can only buy the new house if their old one is sold. In this case, the risk to the seller is that they will not sell their house AND have to give the earnest money deposit back to the buyer. The seller would have to re-list the home and receive no compensation for the failed deal.
A kick-out clause like this allows the seller to keep the home on the market and accept another offer that doesn’t have a contingency that the buyer must sell a home to buy the new one. The seller must notify the first buyer of a new offer and give them 72 hours to respond. The buyer can proceed without selling the first house or cancel the offer.
Additional Earnest Money Deposit
The contract may require you to make an additional earnest money deposit if you haven’t canceled the contract after the deadlines for the due diligence, appraisal, and financing contingencies. If this is applicable to your contract, the amount will be listed in the contract.
Backup Contract Contingency
A second interested buyer can sign a backup contract. If the primary contract is canceled, then this becomes the primary contract. The contract as an expiration date when the earnest money deposit will be returned.
Repairs to Be Made
If you want to ask a seller to perform certain repairs on the home before closing, you can write in a contingency that requires that they get done.
Other possible contingencies on your Utah real estate contract include the sellers buying a home warranty, third-party approval of the contract, a flexible settlement date, and the right for the sellers to obtain a credit report on the buyers. However, these contingencies are less common than the ones we’ve already talked about.
Have Any Questions about Contract Contingencies?
Contract contingencies can be a tricky business. If you have any questions, please get in touch! I’m here to help you figure out what will work best in your situation.
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