Homebuying contingencies protect buyers but can affect the competitiveness of offers. Buyers may choose to waive contingencies based on their financial stability, risk tolerance, and the overall market condition.
Homebuying contingencies are often called the “safety net” of a purchase contract. They are clauses added to a contract that protect the buyer from having to follow through with the purchase if certain things happen (or don’t).
So when a buyer makes an offer on a home that is contingent on something, it means a requirement must be met for them to be obligated to complete the sale. On the other hand, you can choose to make a non-contingent offer, which basically means there are no stipulations or requirements.
Utilizing Homebuying Contingencies
There are different types of contingencies and, in general, sellers prefer receiving offers with fewer of them. Therefore, as a buyer, you want to strike the right balance of having the necessary contingencies that protect you, but not including contingencies likely to result in your offer being rejected.
That said, most home sales contracts do include at least some contingencies, so that’s something sellers expect.
As an agent, I work with my buyers from the very first consultation to map out what the homebuying process involves and the types of contingencies they may want to consider. We also discuss situations in which it may be OK to waive certain contingencies and the risks involved in doing so.
Deciding which homebuying contingencies are best really depends on the home itself, the state of the market, and the buyer’s comfort level.
For example, if you are in a competitive area and trying to outbid other buyers, sometimes toning down some contingencies can boost the strength of your offer. On the other hand, when sellers are getting fewer offers, they may be more open to buyers coming in with extra contingencies.
As an agent, I work with my buyers from the very first consultation to map out what the homebuying process involves and the types of contingencies they may want to consider.
Types of Homebuying Contingencies Buyers Should Know
The most common homebuying contingencies usually involve financing and the home inspection, but there are others as well. Here’s a quick list:
Inspection: Adding an inspection contingency means the buyer can back out if the home inspection report reveals any troubling items.
Financing: This means the buyer is not bound to the contract if they are not approved for a home loan.
Appraisal: This usually falls under the financing umbrella, but it specifies that in order for the sale to go through, the home must appraise at a certain value.
Home Sale: This applies when a buyer is also selling the home they’re currently in and needs to close on that sale to move forward with the purchase.
Each of these contingencies can also be tweaked to allow the buyer and seller to meet in the middle, rather than being super strict.
For example, you could have a home inspection contingency, but only for potential repairs over a certain dollar amount, like $1,000. That way, you’re not nickel-and-diming the seller or demanding a list of minor repairs, but you’re still protecting yourself from being stuck with major issues that are discovered.
The Real Risks of Waiving Homebuying Contingencies
Risk is relative, and there are risks on both sides of the contingency situation. If you decide to go with no contingencies, you could be moving forward with a major purchase without ample protection in place. But if you go too aggressively and add in several contingencies, it could make you a less attractive buyer and make it more difficult for your offer to be accepted.
A good agent should be able to help buyers find the contingency sweet spot based on their needs and what’s going on in the market.
How the Market Can Impact Contingencies
Right after COVID, when interest rates dropped to historic lows, the competition for homes was extreme. And so people were using all sorts of strategies, including waiving contingencies, to increase their chances of getting their offers accepted.
Some of that strategy still applies today. For example, if my client is considering a home that I know has other interested buyers, we will have a conversation about how to beef up the strength of our offer. We talk through the different scenarios, such as not having an inspection contingency.
Obviously, it’s not ideal for a buyer to waive inspection on an older house that hasn’t had any updates in a long time. But if the buyer plans to gut and renovate anyway, or they have ample cash reserves to cover emergency repairs that may come up, then it might be worth it for them to take the risk.
Should You Waive Homebuying Contingencies?
Homebuying contingencies are something for buyers to start thinking about from day one. I usually broach the topic during the very first consultation with buyers, and again when they decide to make an offer.
We’ll think about how competitive they can be price-wise. Then we’ll talk about ways to strengthen the offer, including the pros and cons of adding or removing certain contingencies.
A Buyer Who Waived the Home Inspection Contingency
I can remember one buyer I worked with who was looking at the hottest time of the market and at homes with multiple offers.
We’d already looked at 10 or 15 houses and made multiple offers, but kept getting rejected. When we went to look at a particular house, the buyer fell in love with it and asked me what he needed to do to make the strongest offer possible. He was determined.
It was a beautifully renovated home, and everything looked great, so he decided to take the risk and waive the home inspection. His offer was accepted, and he bought the home. After about three weeks of living in it, though, water and sewage started backing up into the shower, and it wound up requiring a costly repair to the sewer line.
But here's the catch: Even if he had done a full-blown home inspection, it likely wouldn't have caught this problem, since it took a few weeks of water use to reveal itself.
Breaking Down Specific Homebuying Contingencies and When to Waive Them
Let's take a deeper look at the different types of homebuying contingencies, how they benefit you as a buyer, and when you may choose to waive them.
| Type of Homebuying Contingency | How It Protects Buyers | When to Consider Waiving |
|---|---|---|
| Inspection Contingency | Home must pass an inspection without concerning results | Newer or recently remodeled homes; when you plan to renovate anyways |
| Appraisal Contingency | Property must appraise for the agreed-upon purchase price | In competitive markets when you offer above the asking price and can cover any financing shortfalls |
| Financing Contingency | Buyer must be approved for an adequate mortgage | When you have strong finances and are highly unlikely to be denied a mortgage; cash-only offers |
| Home Sale Contingency | Another property must be sold before or concurrent with purchasing the new home | If you're a first-time buyer or not selling your existing home; when you can comfortably cover two mortgages until your current home is sold |
Inspection Contingency
I'm not an inspector, but when I go through a house with a buyer, I try to note any potential red flags to see if waiving the inspection is wise. If I notice anything troubling, like signs of mold or evidence of previous water damage, for example, I would advocate getting the inspection.
The big risk is that once you agree to buy a home with no inspection contingency, you own the full cost of whatever breaks down or needs repair. Older homes and those that haven’t been updated in many years are more likely to have major systems start to break down. Newer, recently renovated homes are usually a safer bet.
Either way, if you are waiving this contingency, it’s important to have a nice cash reserve cushion for things that could go wrong.
Appraisal Contingency
When home values are volatile, an appraisal that isn’t where you need it to be could impact your approved loan amount and tank a sale.
For example, if you want to offer $300K for a house, the bank is going to send someone out to make sure it's worth $300K, because they're not going to overpay for a home. If the appraisal comes in low, a buyer could use this contingency to renegotiate the purchase price or back out of the agreement altogether.
In a competitive market, a buyer may agree to provide appraisal gap coverage to bridge the difference. For example, let’s say sellers are asking $250,000 for a home, but you want to offer $300,000 to make your offer strong.
Even though your offer is contingent on an appraisal, a buyer can say that if it appraises lower than $300K, they agree to cover some or all of the difference between their approved loan amount and the initial offer price.
Financing Contingency
When the purchase of a house is contingent on a bank approving the loan, that’s a financing contingency. If your lender ultimately denies you for a mortgage, you're able to back out of the contract penalty-free. So if you’re a cash buyer, you can make a non-contingent offer. If there are no financing requirements to worry about, there is no contingency.
Home Sale Contingency
If a buyer has to sell their current home in order to buy house number two, that's typically considered an offer contingent on the sale of real estate.
This is very unappealing to a seller, as it adds another layer to the process, which can make things more complicated. However, this type of contingency is sometimes needed because it protects the buyer from potentially carrying two mortgage payments if they don’t end up selling before they move to the new home.
What Buyers Should Remember About Homebuying Contingencies
If I could give one piece of advice to a buyer wondering, “What are homebuying contingencies and should I waive them?” it would be to work with a Realtor who understands and can explain all the contingency options, but who also does not pressure them to go beyond their comfort level. Adding or leaving off contingencies is ultimately the buyer’s decision.
What I remind buyers is that contingencies are important protections to have in your pocket, but waiving contingencies can be an important negotiating tool as well. Even still, that’s not something they have to do right out of the gate on the first offer.
Sometimes it makes sense to feel out the market and see how things go. Choosing which homebuying contingencies to include really depends on the buyer’s situation, the overall strength of their offer, and how competitive the market is.
