What’s a finance contingency, and is it negotiable?
Contingencies are a way of moving the needle on the risk scale—whether the seller or buyer is going to assume it, and by how much.
When you’re buying a property with the help of a bank, a finance contingency (aka mortgage contingency) offers a get-out clause in the event you can’t get the financing in place. (There’s also something called a funding contingency, which will protect a buyer on a new development or resale all the way through to closing, but these are rare in New York City.)
Typically, most developers make buyers waive all contingencies, so the buyer risks losing their deposit if the financing doesn’t come through. But now that the market is slowing down, financing contingencies are being accepted, shifting some of the risk from the buyer to the seller.
David Pfeffer, a real estate attorney with Tarter, Krisky and Drogin, says, “It’s a risk to the seller because if the buyer can’t get financing he’s just taken [the property] off the market for 30 days.”
“Developers need deals,” so contingencies are coming back into play, says Patrick Mills, a real estate broker with CORE. “In the past five or six years, it was not even on the table, it was just too much of a risk for a developer, but what you’re seeing today is more of a limited time-specific finance contingency, like 45 days from the contract signed to get a commitment letter from the bank,” he says.
Mark Maimon, vice president at Freedom Mortgage, agrees, saying sellers “can’t necessarily force a buyer to waive a contingency because they are worried that they might lose that buyer and not sell the unit immediately.”
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The needle on the risk scale is shifting toward the seller, says Christopher Kromer, a broker with Halstead. “Whereas a few years ago, I would be surprised to see a contingency, these days I am surprised not to, especially as there is so much hesitation, uncertainty, and anxiety from the buyers, and sellers don’t have the leverage they once had.”
Mills says it’s yet another sign of the softening market. “As a buyer you can really build up your ammunition with strong financial documents. We’re still not back to the 2010-11 market, where developers would give you a full mortgage contingency. We are not there yet, but it is definitely coming back.”
As for funding contingencies, which fully protect the buyer, Maimon says, “It’s rare that we’d see a funding contingency, but that could also change over time if the market moves more in favor of the buyers.”
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