Contingencies Shmontigencies, who needs ‘em?

These days, it’s more important than ever for home buyers to be protected thoroughly by their purchase contracts. When you put a large sum of money in someone else’s bank account, you want to know that you can get it back if things fall through, right? To make that happen, you need contractual protections, but one is becoming so popular and so necessary it deserves some undivided attention:

The Appraisal Contingency- These are getting more and more common in most markets in the country. Declining values mean that a list price from 6 months ago is probably NOT the market value of today. Where the mortgage contingency lacks, this picks up the slack. The protection offered by this contingency is simple- If the house appraises for LOWER than the contract’s purchase price, you have an option or two. One, walk away, or two, renegotiate. Let’s see what happens WITHOUT this contingency.

Let’s say you are looking at home that’s been on the market for 8 months. 4 months ago, they dropped the price to $400,000. You make a full price offer, based on the fact that you want this house and don’t want to argue about price- they just lowered it a few months ago, you say. The appraisal is done, and it comes in at $380,000. What happens? Well, if you have no appraisal contingency, you could actually be forced to pony up the difference. That’s $20,000 out of your pocket! The alternative is that you walk away, and leave your deposit money on the table. That means the buyer either:

A) Invests another $20,000 into the house in the form of a higher down payment or,

B) Walks away and loses their Good Faith deposit.

BLEGH! Neither of those options are very nice, are they???

Why doesn’t the mortgage contingency cover this issue? Well, the mortgage company bases their loan amount on the lower of the appraised value and the purchase price. They actually don’t care much what purchase price you put in the contract- it doesn’t matter, as they lend on the lower figure only. There were times during the boom where people would pay 5, 10 or 15 thousand dollars more than the appraised value just because they could. Now, no one in their right mind would do that.

To keep yourself and your deposit money well-protected, make sure you have contract contingencies that work in YOUR favor. If you have no ‘out’s and no protections, be prepared to lose the deposit money when/if things turn south. Common contingencies include Inspection, Mortgage, Pest Inspection, Septic and Well Inspection. Adding the appraisal contingency is the most important thing buyers can do today.

Be vigilant! The only people looking out for the buyers are usually the buyers!

Jennifer Monastero

Citizens Community Bank

October 6, 2008