Understanding Home Buying Contingencies in California

Contingencies are one of the most important protections in a California home purchase, but they’re also one of the parts of the contract buyers often find confusing.

Depending on the terms of your offer, contingencies can give you time to investigate the property, obtain financing, review an appraisal, and evaluate important information before moving forward with the purchase.

The specific contingencies and deadlines in your contract matter, especially when you’re considering shortening or removing a contingency to make an offer more competitive.

Understanding what each contingency does can help you make informed decisions about how much protection you want and how much risk you’re comfortable taking.

Understanding the Main California Home Buying Contingencies

While every purchase agreement is different, three of the contingencies buyers commonly encounter involve investigating the property, obtaining financing, and determining the property’s appraised value.

Each serves a different purpose, and removing one contingency does not necessarily remove another.

Investigation and Property Condition

The investigation contingency gives buyers an opportunity to learn more about the property before deciding whether to move forward with the purchase.

A general home inspection is usually just the beginning. Depending on the property, additional inspections or investigations might include:

• Roof
• Plumbing
• Electrical
• HVAC
• Sewer line
• Termite or wood-destroying pests
• Pool and spa
• Foundation or structural components
• Drainage
• Geological conditions

Buyers also have an opportunity to review seller disclosures and other information concerning the property.

For a condominium, townhome, or property within a homeowners association, HOA documents can be particularly important. These may contain information about association finances, insurance, reserves, rules, pending or current special assessments, and other matters that could affect ownership.

The appropriate investigations will depend on the individual property. An older home may raise different questions than a newer condominium, and a hillside or coastal property may warrant additional investigation.

What Happens if an Inspection Finds a Problem?

Finding something during an inspection doesn’t automatically mean the seller is required to repair it.

Depending on the contract and circumstances, a buyer may decide to proceed with the purchase, request repairs, request a credit or other adjustment, attempt to renegotiate, or exercise applicable contractual rights.

This is one reason it’s important to complete investigations within the time allowed by the purchase agreement and understand your options before removing the contingency.

Loan Contingency

For buyers financing their purchase, the loan contingency can provide important protection while the lender completes the approval process.

A preapproval before making an offer is important, but it isn’t the same as final loan approval.

After an offer is accepted, the lender may still need to verify financial information, review documents, evaluate the property and satisfy underwriting requirements.

The amount of time needed can vary based on the lender, loan program, buyer and property.

Before agreeing to a shortened loan contingency period, I want my buyers to speak directly with their lender and make sure the proposed timeline is realistic.

Appraisal Contingency

The appraisal contingency is separate from the loan contingency.

When a buyer is financing a purchase, the lender will generally obtain an appraisal to help determine the property’s value for lending purposes.

If the appraisal comes in below the purchase price, it can create a gap between the agreed-upon price and the value being used by the lender.

Depending on the purchase agreement and contingencies that remain in place, the buyer may have several possible options. Those could include bringing additional cash to the transaction, attempting to renegotiate with the seller, or exercising rights provided by the contract.

It’s important to understand the financial consequences before agreeing to waive or limit appraisal protection.

Removing Contingencies

This is an area where buyers sometimes misunderstand the California purchase process.

A contingency deadline isn’t something you should simply ignore because the date has arrived.

With the C.A.R. Residential Purchase Agreement, contingency removal is generally handled in writing. Your agent should review upcoming contingency dates with you and discuss whether the necessary investigations, financing steps, or appraisal have been completed before you decide whether to remove a contingency.

Removing a contingency is an important contractual decision because it can affect the options available to you later in the transaction.

I don’t want a buyer removing a contingency simply because a date appears on the calendar. I want them to understand what has been completed, what remains outstanding, and what removing that protection means.

Making a Competitive Offer Without Taking Unnecessary Risk

In a competitive market, buyers may consider shorter contingency periods or other terms intended to strengthen an offer.

But a stronger offer isn’t automatically the one with the fewest protections.

The goal is to create an offer that is attractive to the seller while still making sense for the buyer.

Before changing contingency periods, consider:

• How quickly your lender can realistically perform
• How soon inspections can be scheduled
• The age and condition of the property
• Whether the property belongs to an HOA
• Whether specialized inspections may be needed
• Your available cash if the appraisal comes in low
• Your comfort level with the financial risk involved

Sometimes a shorter contingency period is reasonable. Other times, giving yourself additional time is more important than making the offer slightly more aggressive.

HOA Documents Can Matter Too

If you’re buying a condo, townhome, or home within an HOA, reviewing the association documents is an important part of your due diligence.

Depending on the community and documents provided, you’ll want to understand items such as:

• HOA dues
• Financial reserves
• Insurance coverage
• Current or proposed special assessments
• Rules and restrictions
• Rental restrictions
• Parking requirements
• Pet restrictions
• Maintenance responsibilities

HOA finances and insurance can also affect financing and insurability, so getting these documents reviewed early in the transaction can be important.

Insurance Should Be Investigated Early

Insurance has become an increasingly important part of buying a home in California.

Don’t wait until the end of your contingency period to start looking for coverage.

As soon as your offer is accepted, contact an insurance professional and begin investigating the availability and cost of coverage for the specific property.

The location, claims history, property characteristics, wildfire exposure, HOA master policy, and other factors may affect coverage and cost.

For a condo or townhome, you’ll also want to understand what the HOA’s master insurance policy covers and what insurance you’ll need individually.

Every Property and Every Offer Is Different

There isn’t one contingency strategy that’s right for every buyer.

A newer condominium in Aliso Viejo may require a different approach than an older single-family home in Laguna Hills or a coastal property in San Clemente.

The buyer’s financing, available cash, property condition, market competition, HOA, insurance considerations, and personal risk tolerance all matter.

That’s why I prefer to look at contingencies as part of the entire offer rather than treating them as a standard set of deadlines that should be shortened automatically.

Before You Remove a Contingency

Before removing any major contingency, make sure you understand what you’re agreeing to.

Some questions worth asking include:

• Have I completed the inspections and investigations I wanted?
• Have I reviewed the seller’s disclosures?
• Have I reviewed applicable HOA documents?
• Am I comfortable with the condition of the property?
• Have I investigated homeowners insurance?
• Has the appraisal been completed if applicable?
• Where does my loan stand with underwriting?
• Are there any unresolved lender conditions?
• What happens to my deposit if I later decide not to complete the purchase?

Your real estate agent and lender can help you understand the status of the transaction, and legal or other professional advice may be appropriate when a question goes beyond the scope of your agent’s expertise.

Buying With Confidence

Contingencies aren’t simply obstacles between an accepted offer and closing. They’re an important part of the due diligence process.

The goal isn’t to keep every contingency in place for as long as possible or remove them as quickly as possible. It’s to understand what each protection does and make informed decisions based on the particular home and transaction.

When I’m helping a buyer in South Orange County, my job is to keep track of the deadlines, help coordinate the due diligence process, communicate with the lender and other professionals, and make sure my client understands what’s happening before important decisions are made.

If you’re thinking about buying a home in South Orange County and want help understanding the process from the first showing through closing, I’d be happy to help.

Frequently Asked Questions

What is a contingency when buying a California home?

A contingency is a provision in the purchase agreement that makes the buyer’s obligation to proceed dependent on specified conditions or investigations. The exact protections depend on the terms of the individual contract.

What are the main contingencies when buying a home?

Common contingencies involve the buyer’s investigation of the property, financing, and appraisal. Other contractual provisions and investigations may also apply depending on the transaction.

Is an appraisal contingency the same as a loan contingency?

No. They address different issues. A loan contingency relates to obtaining financing, while an appraisal contingency addresses the property’s appraised value under the terms of the purchase agreement.

Does a contingency automatically disappear when the deadline passes?

Under the C.A.R. Residential Purchase Agreement, contingency removal is generally handled in writing. Buyers should discuss contingency deadlines and removal with their agent rather than assuming a protection has automatically disappeared.

Should I waive contingencies to make my offer stronger?

Not automatically. Removing or limiting contingencies can increase a buyer’s risk. The decision should be based on the property, financing, market conditions, available cash, and the buyer’s circumstances.

When should I start looking for homeowners insurance?

Start early, preferably as soon as your offer is accepted. Insurance availability and cost can vary considerably from one property to another.