What are real estate contingencies?

Found your dream home and ready to submit an offer? Take a moment to review your list of contingencies.

In a competitive seller’s market, contingencies might make your offer less appealing. However, in a buyer’s market, they provide an advantage by helping you secure the best deal on your dream home.

If you’re up against other buyers, you may consider minimizing the number of contingencies to strengthen your offer, but let’s make sure you know what you’d be signing up for.

Related: Mortgage temperature check 2024: Canadians watching for a turning point in the housing market

What is a contingency, and what are the different kinds?

When you find a home you want to purchase, you submit an offer to the seller. This offer outlines the terms and price at which you’re willing to buy the property. However, this offer is conditional because it includes specific requirements that must be met for the sale to proceed.

These conditions are called contingencies, and they act as safety nets during the homebuying process.

Contingencies typically have a specific timeframe (usually 3 to 7 days) within which they must be satisfied. If they’re all met within this period, the offer becomes ‘firm’ and legally binding between you and the seller.

Read more: What's the “buyer beware” principle when it comes to buying a home?

Several contingencies play a role in protecting both homebuyers and sellers. Here are the most common ones:

Appraisal contingency

When you’re buying a home, a professional appraiser evaluates the property’s value. They consider various factors, such as the home’s condition, location, size, and comparable sales in the area. The goal is to determine a fair market value for the property.

This contingency allows the buyer to renegotiate or cancel the purchase offer if the home doesn’t appraise for an amount equal to or above the offer price. If the appraisal falls short, the buyer can adjust their offer or back out without penalties.

Financing contingency (mortgage contingency)

With this contingency, you can cancel the contract if your mortgage financing falls through. If the lender denies the mortgage application, the buyer isn’t obligated to proceed with the purchase.

Whether you include this contingency or not, it’s always a good idea to get pre-approved for your mortgage so you know exactly how much you can afford in a home and avoid financial surprises.

Home sale contingency

This contingency applies when the buyer needs to sell their current home before purchasing a new one. If your existing home sale falls through, you can back out of the purchase without penalties. However, sellers may be hesitant to accept offers with this contingency, as it introduces a lot of uncertainty.

Inspection contingency

The inspection contingency allows the buyer to hire a professional home inspector to assess the property’s condition.

If significant issues are discovered (e.g., structural defects, safety hazards, or major repairs needed), you can negotiate repairs, request credits, or even withdraw from the deal entirely if the repair costs surpass your budget and the amount of work you’re willing to put in to restore the property.

Title contingency (less common)

A title contingency ensures that the property’s title is clear and free of any liens (legal claims against an asset), or any other legal issues. If title problems arise during the due diligence period, you can either address them or terminate the contract entirely.

Related: The hidden costs of buying a home

Should you forgo a conditional offer and include no contingencies?

Waiving contingencies means you’re willing to proceed with the purchase even if certain conditions aren’t met. It can make your offer more attractive to sellers because it streamlines the transaction process and the seller can move forward with confidence, knowing there won’t be last-minute surprises.

However, it shifts a lot of the risk to you, as the buyer. If you waive contingencies and later discover issues (e.g., structural problems, hidden defects), you’re committed to the purchase without an “escape route.”

Here are some risks:

Waiving the financing contingency

A financial contingency gives you a specific period (usually five to seven business days) to ensure you can secure a mortgage approval for the property. During this time, you can walk away from the offer without penalties if your financing is denied or if the financing terms are unsatisfactory.

When you remove this contingency, you commit to purchasing the property even if your loan application is denied. Make sure you have solid pre-approval from your lender before considering this step.

Skipping the home inspection

While a home inspection isn’t legally required, skipping it can lead to unpleasant surprises later. A thorough inspection helps you uncover major issues, potentially saving you thousands in future repairs.

An inspection will identify any safety concerns, help you prepare for future repairs based on inspection findings, give you room for negotiating the price of the home, potentially bring down the appraised property value and consequently, make it easier to get approved for a mortgage.

Interest rate changes

If interest rates rise significantly after your offer is accepted, you’ll still be bound by the terms of your offer. This could impact your monthly mortgage payments significantly, especially in this climate and impact your overall affordability.

Property values

Real estate markets can be unpredictable. If property values decline after your offer is accepted, you may find yourself overpaying for the home.

Remember, once a seller accepts your unconditional offer, you’re legally bound to purchase the house.

When contingencies are waived, your offer becomes more binding. If you back out without a valid reason, you risk losing your home deposit or facing legal action from the seller.

To protect yourself – without losing out on the sale – it's best to work closely with a skilled and trusted real estate agent. They’ll help you identify the right contingencies based on your situation.

Read next: Walking away from your home purchase offer – know the consequences