Savvy sellers know it's important to limit contingencies to prevent the sale from dragging on and on. But does that mean that buyers shouldn't win on any contingency issue? Hardly. Sellers need to decide (even before the first offer hits) which contingencies will be considered and which will be vehemently objected to.

SUITABLE CONTINGENCIES

Although it's a judgment call based on what the seller wants to achieve and how quickly results are required, suitable contingencies in the sale might include:

1) Financing contingencies: Even though the buyer is pre-approved for a mortgage, much can happen between pre-approval and formal loan application. Debt can be added, income eroded, or credit blemished. That's why most buyers will request a phrase similar to “the purchase is contingent upon the buyer qualifying for and obtaining a conventional mortgage of approx. $140,000, payable at a maximum interest rate of 8.5% for a maximum term of thirty years with monthly payments not to exceed $1,077 principal and interest only.” This also allows the buyer an optional escape should interest rates rise, causing the payment to exceed his comfort zone.

Can a financing contingency clause also benefit a seller? Absolutely. The seller may want to add the provision that the sale is contingent upon the buyer receiving loan approval by a certain date (well in advance of the formal closing date.) That way, the seller won't be stuck biding time with a buyer who can't finance the property and hopefully allow a back-up buyer to step into a sale with the seller.

2) Appraisal contingencies: In order for buyers to obtain a mortgage, the property must appraise for at least the amount stated on the purchase agreement. That's why an appraisal contingency is necessary. Unless the appraisal is on target with the purchase price, the buyer doesn't have to buy (potentially having to come up with the difference in cash.) Likewise, the seller doesn't have to sell and potentially take less than the offered price (although some sellers do renegotiate with the buyer if appraisals fall short.)

3) Home inspection: For the past decade, home inspections have been a staple in purchase and sales contracts. Not only do they potentially protect a buyer from purchasing a property without being aware of possible or potential defects, they provide a risk-reduction mechanism for the seller. Should there later be a claim against the seller from the buyer, the home inspection report can serve as documentation that the buyer was aware of a potential problem prior to closing and chose to discount it.

In Part IV of this article to follow on Monday, July 24, we'll discuss contingencies to avoid and alternatives to those contingencies that may keep the buyer satisfied and your sale out of a perpetual holding pattern.