After you and the seller have agreed (in writing) to all of the terms of the contract, time becomes very important. The clock for all of the contingencies in the contract start ticking the moment the contract is ratified. The most common contingencies are a home inspection contingency, appraisal contingency and financing contingency. Of course, there are a multitude of other contingencies that are available to buyers and sellers and the circumstances of your purchase will dictate which contingencies are appropriate.
Home Inspection
A home inspection serves two very important purposes. The first (and most obvious), is that it provides an opportunity for a professional to evaluate the property’s condition. The second is that it provides an opportunity for you to learn how to maintain and care for your new home.
Under Virginia law, a seller has to disclose very little about the condition of a property to a potential buyer (see the poorly named Virginia Residential Property Disclosure for details). A seller cannot conceal or hide any defects. It is best to think of a Virginia as a “buyer beware” state which makes a home inspection that much more important.
The home inspector will conduct a visual inspection. The inspector will look at everything s/he can see without causing damage to the property. The inspector will look at the major mechanical systems including the furnace and air conditioning systems, plumbing and electrical systems, as well as the roof and chimney. Some inspectors include household appliances as part of their inspections; others don’t. Inspectors are not permitted to pull up carpet, make holes in walls or otherwise cause damage to the property as part of the inspection.
The home inspector is a generalist who will note defects at the property. If an inspector notices something that raises a question or causes concern, sometimes s/he will recommend a specialized professional look at the issue. One example is a chimney inspection. A home inspector will get a visual inspection of the flue as far up as s/he can see. If visibility of the flue is limited, a home inspector may recommend a chimney company perform a more thorough inspection with a remote camera that can access the entire flue.
In addition to providing information about the current condition of a home, a home inspection is helpful in determining how much maintenance a house may require in the near and far term. During the inspection, a home inspector can provide a “life expectancy” estimate for items such as roofs, furnaces and appliances which is helpful for planning for future expenses.
Many buyers choose to have a radon test done in conjunction with a home inspection. The EPA has provided very useful information about radon on its website.
Financing Contingency
Unless you are paying cash for the property, you will obtain a loan to complete your purchase. Including a financing contingency in your contract means you have a set number of days (chosen by you and agreed to by the seller) during which you promise to work with your lender to finalize the details of your loan. At the end of the financing contingency the lender will either produce a commitment letter (the lender’s promise to make the loan as stated) or a denial letter stating you are not eligible for financing. Receiving a denial letter does not necessarily mean you will be able to void the contract under the terms of the contingency. The financing contingency is written very narrowly so it is important that the terms of the contingency be crafted with care so that you do not waive any of your rights.
Appraisal Contingency
Immediately after a contract is ratified, your lender will order an appraisal. This is for your benefit as well as the lender’s. The lender wants to ensure that the property has enough value to support the loan. The appraisal is completed by a neutral third party who has no stake in the transaction. The appraiser tours the home, compares it to similar homes in the area and determines the fair market value of the property. If this value is equal to or greater than the contract price, the contingency is satisfied and everyone continues to work toward settlement. If the appraised value is less than the contract price, then you, the buyer, can ask the seller to reduce the contract price to the appraised value. If the seller does not agree to do this, you and the seller can negotiate alternate terms. If such negotiations are unsuccessful, the contract will be void.