Home buyers, especially inexperienced ones, sometimes become so enraptured with a property that they are willing to hastily commit to a deal for fear of losing the opportunity. But there are numerous protections available that buyers might end up forgoing until the contract is subjected to scrutiny. Among the most important elements of a residential real estate contract are contingency clauses. These provisions allow the buyer to back out of the contract or renegotiate if certain conditions are not satisfied, without losing the deposit they have put down. 

Here are common contingency clauses in home purchase contracts that buyers should make sure are included in their contract:

• Mortgage financing contingency — This clause states that the sale is contingent upon the buyer obtaining a mortgage of a certain minimum amount at a specified interest rate. There are usually deadlines set for the buyer’s action in obtaining the loan. Without this clause, a buyer might be forced to proceed with the sale on a cash basis or face loss of their deposit.

• Home inspection contingency — This clause allows the buyer to have the property inspected professionally before the sale is finalized. The inspection will reveal significant issues such as structural damage or faulty mechanical or electrical systems. In lieu of cancelling the deal, the buyer can obtain repair estimates and ask the seller for a credit against the purchase price.

• Appraisal contingency — This clause states that the sale depends on the property being appraised at or above the agreed-upon purchase price. If a mortgage is part of the deal, the lender will require this clause to avoid issuing a loan based on inadequate collateral. If the appraisal comes in too low, the buyer can renegotiate the price or back out of the sale.

• Sale of existing home contingency — For buyers who already own a home, this clause ensures they won’t be stuck with two mortgages. It states that the purchase of the new property is dependent on the buyers selling the current home, typically within a specified time frame. This clause is useful in slow housing markets or when the buyer’s current home is a unique property.

• Title contingency — This clause requires that a title search be performed to uncover potential legal issues that could affect the seller’s title and therefore the buyers’ ownership rights, such as liens, easements or boundary irregularities. If any problems are found, the seller must resolve them or offer the buyers a credit against the purchase price.

• HOA review contingency — This clause gives the buyers time to review the homeowners association’s rules, fees and governing documents and to make sure they understand the obligations and limitations that come with the property. The buyer can back out of the deal if they find the HOA's restrictions too burdensome or the fees too high. 

Before signing a contract, buyers should work with a California real estate attorney to ensure that these contingencies are clearly drafted and negotiated. This approach reduces risk and ensures that buyers can make informed decisions during the course of the transaction.

Favaro, Lavezzo, Gill, Caretti & Heppell, PC providing sound real estate law advice and effective representation for clients in Solano, Contra Costa and Napa counties. If you are seeking counsel for a real estate transaction in the North Bay Area, call our firm at 707-674-6057 or contact us online.