Whether you’re buying or selling real estate, it’s very important to understand offer contingencies for your transactions. Contingencies are clauses written into your offer and purchase and sale agreements. They essentially create rules that both parties have to follow, or the contract becomes null and void. Buyers want to make sure that they are making a proper investment, whether or not they are an investor or a homeowner. Sellers will want to protect themselves and may push back on unreasonable contingencies. In this article we will explain the most common types of contingencies you will encounter when selling your real estate investments, or strategies you might want to employ when buying your next investment.
Whether you’re buying or selling real estate, it’s very important to understand offer contingencies for your transactions. Contingencies are clauses written into your offer and purchase and sale agreements. They essentially create rules that both parties have to follow, or the contract becomes null and void. Buyers want to make sure that they are making a proper investment, whether or not they are an investor or a homeowner. Sellers will want to protect themselves and may push back on unreasonable contingencies. In this article we will explain the most common types of contingencies you will encounter when selling your real estate investments, or strategies you might want to employ when buying your next investment.
Standard Homebuyer Contingencies:
The first things we should explore are the typical contingencies you will encounter when selling condominiums or single family homes to end users. As a property owner, the one that most directly impacts you would be the inspection contingency. This type of contingency typically states that the property will be inspected within a specified timeframe, and any major issues must be amended once identified. Home / property inspectors will give a thorough examination of your property and identify any potential issues on behalf of the buyers. If you are selling a unit from your new construction project, you shouldn’t have too many issues, though it’s inevitable there will be some small issues that diligent inspectors will pick up on. The home inspector will more likely have a larger list of issues if you have an older building you have owned and rented out with deferred maintenance. The thing to keep in mind with both scenarios is that if you are a responsible owner or developer your building should be in tip-top shape and the issues the inspector uncovers should be easily repaired. If you are that responsible type of owner and you have an inspection that uncovers some issues you were unaware of, don’t worry. This is very typical and property inspectors make a living in uncovering things others may have missed.
- Lead and Asebstos:
These are both dangerous substances previously widely used in construction. Lead paint has been proven to have damaging health effects, especially when young children are involved. Asbestos can cause the deadly lung cancer called mesothelioma. Growing up, my father actually made a living by de-leading houses. Trained professionals like my dad know how to remove these chemicals and state and local governments can often subsidize some portion of those expenses.
- Radon:
Radon is a natural radioactive substance that is released from the earth if you are in certain areas. Normally harmless, it can become a health concern in high concentrations. Modern homes are so well insulated that areas where the earth emits radon can be dangerous without proper ventilation. Radon testing kits are popularly used now by homebuyers to make sure this will not be an issue for them. If you built a home or condominium building and an inspector detects radon, don’t worry. It’s easy and affordable enough to install ventilation systems.
- Foundation:
Looking at the structure(s) foundation is one thing a good inspector will never overlook. This is a topic we’ve discussed in previous articles, but look out from water damage and intrusion, as well as horizontally-oriented cracks. These indicate more serious problems.
- Roof and Siding:
The age of your roof and siding systems, as well as any water and weather related damage will be one of the things a good inspector will focus closely on. They will advise the buyer if a roof or siding system has gone past their expected lifespan and will also look out for sign of past water and weather damage you may have already repaired. As always, being honest from the beginning about any issues your property has had will save you time and money in the long run, as well as make you friends for being an upstanding person. Make sure to check out our 5 Key Steps for Property Owners and Managers to Reduce Water Damage article for more tips related to water issues.
- Government-subsidized or other local inspections:
On a related point, if you are renting or selling to individuals involved with government or other non-profit subsidies, you will likely need to comply with additional inspections that have their own guidelines. We go in to this topic in some detail in our Section 8 and Government Subsidized Tenants Explained article.
Standard Homebuyer Contingencies:
The first things we should explore are the typical contingencies you will encounter when selling condominiums or single family homes to end users. As a property owner, the one that most directly impacts you would be the inspection contingency. This type of contingency typically states that the property will be inspected within a specified timeframe, and any major issues must be amended once identified. Home / property inspectors will give a thorough examination of your property and identify any potential issues on behalf of the buyers. If you are selling a unit from your new construction project, you shouldn’t have too many issues, though it’s inevitable there will be some small issues that diligent inspectors will pick up on. The home inspector will more likely have a larger list of issues if you have an older building you have owned and rented out with deferred maintenance. The thing to keep in mind with both scenarios is that if you are a responsible owner or developer your building should be in tip-top shape and the issues the inspector uncovers should be easily repaired. If you are that responsible type of owner and you have an inspection that uncovers some issues you were unaware of, don’t worry. This is very typical and property inspectors make a living in uncovering things others may have missed.
- Lead and Asebstos:
These are both dangerous substances previously widely used in construction. Lead paint has been proven to have damaging health effects, especially when young children are involved. Asbestos can cause the deadly lung cancer called mesothelioma. Growing up, my father actually made a living by de-leading houses. Trained professionals like my dad know how to remove these chemicals and state and local governments can often subsidize some portion of those expenses.
- Radon:
Radon is a natural radioactive substance that is released from the earth if you are in certain areas. Normally harmless, it can become a health concern in high concentrations. Modern homes are so well insulated that areas where the earth emits radon can be dangerous without proper ventilation. Radon testing kits are popularly used now by homebuyers to make sure this will not be an issue for them. If you built a home or condominium building and an inspector detects radon, don’t worry. It’s easy and affordable enough to install ventilation systems.
- Foundation:
Looking at the structure(s) foundation is one thing a good inspector will never overlook. This is a topic we’ve discussed in previous articles, but look out from water damage and intrusion, as well as horizontally-oriented cracks. These indicate more serious problems.
- Roof and Siding:
The age of your roof and siding systems, as well as any water and weather related damage will be one of the things a good inspector will focus closely on. They will advise the buyer if a roof or siding system has gone past their expected lifespan and will also look out for sign of past water and weather damage you may have already repaired. As always, being honest from the beginning about any issues your property has had will save you time and money in the long run, as well as make you friends for being an upstanding person. Make sure to check out our 5 Key Steps for Property Owners and Managers to Reduce Water Damage article for more tips related to water issues.
- Government-subsidized or other local inspections:
On a related point, if you are renting or selling to individuals involved with government or other non-profit subsidies, you will likely need to comply with additional inspections that have their own guidelines. We go in to this topic in some detail in our Section 8 and Government Subsidized Tenants Explained article.
Mortgage/Lending Contingency
Most real estate transactions include a mortgage contingency. This type of contingency lays out the terms your buyer is looking for from their lender and how long until they receive an official commitment. If a buyer has a mortgage contingency, make sure they provide you with a pre-qualification letter from a lender that has already reviewed them and considers them someone they will probably lend to. Additional things to look out for here are the LTV (loan to value) ratio. The safest bet, if you have the option, is to look for buyers with a 75% LTV or lower. The majority of first-time home buyers will be purchasing at at 90% or higher LTV through FHA and other programs offered by the government. This all depends on your price point and market. Lower price points will usually have more buyers with higher LTVs, so you may need to depend more on the pre-qualification letter in those scenarios.
Mortgage/Lending Contingency
Most real estate transactions include a mortgage contingency. This type of contingency lays out the terms your buyer is looking for from their lender and how long until they receive an official commitment. If a buyer has a mortgage contingency, make sure they provide you with a pre-qualification letter from a lender that has already reviewed them and considers them someone they will probably lend to. Additional things to look out for here are the LTV (loan to value) ratio. The safest bet, if you have the option, is to look for buyers with a 75% LTV or lower. The majority of first-time home buyers will be purchasing at at 90% or higher LTV through FHA and other programs offered by the government. This all depends on your price point and market. Lower price points will usually have more buyers with higher LTVs, so you may need to depend more on the pre-qualification letter in those scenarios.
Entitlement / Zoning Contingencies
These are more complicated contingencies used by developers. Say you find a piece of land in a high-growth area that does not qualify to build a large apartment building. You have local knowledge and relationships that lead you to believe this apartment building might be something the local government would support. These situations will require zoning variances or special permits. Investing in opportunities such as these is one of the cornerstones of our company’s success, and is covered in-depth in our Millions through Multi-Family Development Mastermind Course. Depending on the complexity of the entitlement process in your area, this may take many months or over a year. Some strategies or methods to get properties under contract with zoning contingencies include:
- Tiered pricing: This method is when you offer to pay more or less depending on the end result of how many units or how much total square footage you get approved for.
- Non-refundable deposits: You can offer that your money goes “hard” if you do not have zoning approvals past a certain date. This can give the seller some more comfort that you are in it for the long haul.
- Interest payments: You could also offer to pay interest payments if you go past a certain date. This is similar to your deposit money going “hard” and they are often used in combination with each other.
- Off-market and patient owners: Find off-market sellers that are in no rush to get the deal done. They are more likely to consider these types of deals as they can be patient and see the long term benefit.
- Affordable Housing: This is somewhat related and an important thing to mention while we are on this topic. If you are attempting an affordable housing development or renovation, you will need plenty of time to assemble the funds necessary from the government and other agencies. We cover this in-depth in our How to Develop Affordable Housing article. The local government may award you land for affordable developments, but if you are buying lots on the open market with the intention of creating affordable housing, you will need more protections as you assemble the pieces of the deal together. You will need to have many contingencies in place, including but not limited to zoning and lending contingencies.
- Tiered pricing: This method is when you offer to pay more or less depending on the end result of how many units or how much total square footage you get approved for.
Entitlement / Zoning Contingencies
These are more complicated contingencies used by developers. Say you find a piece of land in a high-growth area that does not qualify to build a large apartment building. You have local knowledge and relationships that lead you to believe this apartment building might be something the local government would support. These situations will require zoning variances or special permits. Investing in opportunities such as these is one of the cornerstones of our company’s success, and is covered in-depth in our Millions through Multi-Family Development Mastermind Course. Depending on the complexity of the entitlement process in your area, this may take many months or over a year. Some strategies or methods to get properties under contract with zoning contingencies include:
- Tiered pricing: This method is when you offer to pay more or less depending on the end result of how many units or how much total square footage you get approved for.
- Non-refundable deposits: You can offer that your money goes “hard” if you do not have zoning approvals past a certain date. This can give the seller some more comfort that you are in it for the long haul.
- Interest payments: You could also offer to pay interest payments if you go past a certain date. This is similar to your deposit money going “hard” and they are often used in combination with each other.
- Off-market and patient owners: Find off-market sellers that are in no rush to get the deal done. They are more likely to consider these types of deals as they can be patient and see the long term benefit.
- Affordable Housing: This is somewhat related and an important thing to mention while we are on this topic. If you are attempting an affordable housing development or renovation, you will need plenty of time to assemble the funds necessary from the government and other agencies. We cover this in-depth in our How to Develop Affordable Housing article. The local government may award you land for affordable developments, but if you are buying lots on the open market with the intention of creating affordable housing, you will need more protections as you assemble the pieces of the deal together. You will need to have many contingencies in place, including but not limited to zoning and lending contingencies.
- Tiered pricing: This method is when you offer to pay more or less depending on the end result of how many units or how much total square footage you get approved for.
