What the Heck Are Contingencies?

Dear Boston Real Estate Agent,

I’m house hunting and I hear about contingencies all the time. What the heck are they, and why are Bostonians always waiving them?

A contingency allows for a buyer to cancel their contract to purchase without penalty, allowing them to get their deposits back. When you’re buying a home, there are several types of contingencies that come into play.

The two key contingencies we see in our market relate to home inspections and financing. In a competitive market like Boston’s, competition amongst buyers is fierce. Many are resorting to various strategies to make their offer stand out, particularly in multiple offer scenarios. Submitting an offer over the asking price or a quick closing isn’t always going to be enough to clinch the deal, so some buyers are waiving one or both of the above contingencies to make their offer more attractive to a seller. If a contingency is waived, a buyer can no longer rely on that contingency as a justification for not proceeding with the purchase. It’s risky to waive contingencies, and it’s important for buyers to understand the risks before eliminating these important buyer safeguards.

There are creative ways to mitigate some of the risks associated with waiving contingencies. For example, with respect to a home inspection, rather than waiving your home inspection outright, a buyer can conduct a pre-sale inspection, which would take place prior to submitting an offer. This is not an inexpensive strategy, however, it may prove better to be safe than sorry. Considering the generally older age of Boston’s housing inventory, the risk of doing no inspection whatsoever is real and therefore alternate strategies may be necessary to be competitive and safe. Alternatively, a buyer can submit an offer shortening the home inspection time window to one or two days and/or proposing to conduct the home inspection for informational purposes only.

On the financing contingency side, there is arguably significant financial risk. But in a stable economy and job market, more and more buyers are often waiving their financing (AKA “mortgage”) contingency in an effort to compete with true cash buyers. It is vital for a buyer to have an explicit conversation with their lender prior to considering waiving their finance contingency and taking on this calculated risk. By waiving a financing contingency, a buyer forfeits that their earnest money deposits are protected if an issue were to arise relating to financing (i.e. loss of job, condo approval, etc.).

Condominiums pose a higher risk for buyers than a single-family home, as condominium purchases require an additional approval stage where a bank digs deeper into the health of a condominium association (referred to as the condo approval), which is completely outside the buyer’s control. Should a buyer choose to waive their financing contingency, they are potentially exposing themselves to forfeiting five percent—or more, in some cases—of the purchase price if the buyer is unable to secure financing.

The various scenarios and risks are extensive but the take away here is to sit down with your real estate agent and discuss all of your options and strategies in an effort to make your offer as strong as it can be. The competitiveness of the downtown market can be discouraging, making it even more important to work with an agent who you trust to guide you through the process.