Understanding Contingencies in a Real Estate Contract

What are Contingencies in a Real Estate Contract?

When writing an offer on a home purchase, the buyer will often write in contingencies, or conditions of the offer. A contingency is a clause in the contract that specifies a particular action or requirement. Both buyer and seller have to agree to the conditions in each contingency and all contingencies must be signed along with the contract.

A contingency is a provision in a real estate contract that specifies the contract would cease to exist upon the occurrence of a certain event.

An example: if a seller has accepted an offer on a home, but still needs to find a new home, they might include a contingency that gives them an out if they don’t find a new home by a certain date. All details would be spelled out in the contract addendum.

Contingencies in real estate also serve to protect the buyer and the seller by providing a way out of the contract under certain conditions. Either party may cancel the contract in case they cannot perform or choose not to perform on the contract or if conditions aren’t met. In other words, the sale is contingent upon these conditions.

For buyers, the main issue is their deposit. If contingencies are not met, they can void a contract without fear of losing their deposit.

For sellers, contingencies can help to protect them from buyers who may back out of the deal for any reason.

There are several contingencies that are common.

Common Contingencies in a Maryland Contract

• Financing Contingency:  This gives the buyer time to apply for and obtain financing for the purchase of the property. Unless the buyer is paying cash for a home, the financing contingency will insure that if the buyer’s loan gets turned down for any reason, they will be released from the contract. The contingency will specify a date by which the buyer needs to secure a mortgage.
• Appraisal Contingency:  Every lender requires an appraisal. If the home appraises for less than the contracted price, then the lender will not agree to lend that amount for the home, and the buyer can back out. (The buyer and seller can also negotiate another solution.) This is why we often call the appraisal “the second sale”. They have to be assured that if the buyer ever defaults on the loan, they will be able to re-sell the home for the amount loaned on it. Appraisals can be challenged, if buyers and sellers are patient. If the appraisal on the home is higher than the purchase price, this can be good for the buyer. The loan is not in jeopardy…but not so good for the seller.
• Home to Sell (or settle) Contingency:  If a buyer still has to settle or sell their previous home, they can write in a home-to-sell contingency, or home-to-settle contingency. If their home doesn’t sell by the specified date, they can void the contract without penalty. In a competitive buyers’ market, it is not to the buyer’s advantage to have a home to sell. In a market with high inventory and fewer buyers, it is more feasible.
• Home Inspection Contingency:  This gives the buyer the right to have the home inspected by a set date, and determine if the condition of the property works for them financially. It is always the buyers right and choice to have a home inspection, and we highly recommend it. If they discover a major flaw in the home that they just can’t live with, they can void the contract. Getting the home inspection done as soon as possible leaves time for negotiation and repairs, if necessary. If the seller elects not to do repairs or remediation, if issues are found, the buyer has the right to void the contract without losing their deposit.
• Other Inspection Contingencies:  Septic, well, termite or pest inspection, radon, lead paint, chimney, and various other inspections can be done, depending on the type of home, the requirements of the mortgage, or the desires of the buyer.
• HOA Contingency:  The buyer has the right to inspect the HOA documents, and can void after a certain number of days (negotiated in the contract). The buyer can usually void the contract unconditionally, or for any reason if they don’t like what they read in the HOA rules.
• Condominium Documents Contingency: Similar to the HOA contingency, a buyer has the right to void a contract if they find something objectionable in the condo docs.

Any time that inspections uncover issues, the buyer and seller can renegotiate. Contingencies are a part of real estate contracts and so are renegotiations — but only in limited areas and according to the contract.

If you are considering buying or selling a home, it is important to discuss contingencies with your real estate agent or attorney. Contingencies in real estate contracts can be a valuable tool for protecting both buyers and sellers. Some buyers and sellers never fully read the contract — be sure to read yours. Be sure to ask your real estate agent any questions you come up with… that’s what they’re here for.

Addendum to the Maryland Contract

The Maryland contract has been formed over the years by real estate lawyers for the purpose of streamlining the buying and selling of residential property. The use of these “model forms” saves homebuyers and sellers large sums because they don’t have to pay a lawyer to draft a contract every time they sell.

The Maryland Realtors contract is 11 pages. There are usually a number of addenda that are added to the contract, depending on several factors. The lender may require them, the buyer may choose them, and the Federal, state, and county, and sometimes city will require addenda. Some of the most common include:

• Financing contingency addendum: This addendum gives the buyer more time to secure financing for the purchase of the property.
• Cash appraisal contingency:  If you are buying a home with cash, and you want to know the appraised value, you can use this addendum. It gives the buyer the ability to terminate the contract if the property doesn’t appraise for the agreed-upon price.
• Inspection contingency addendum: The property inspections addendum gives the buyer more time to have the property inspected by a licensed inspector.
• Home sale contingency addendum: This addendum gives the buyer more time to sell their existing home before purchasing a new one.
• Homeowners association or condo association addendum: This addendum specifies the buyer’s obligations to the homeowners association.
• As-is addendum: This addendum waives the buyer’s right to have the property inspected and allows the seller to sell the property in its current condition, without any warranties to making repairs. With an “As-is Addendum” there are two options: An As-Is without a home inspection, and An As-Is with the right to a home inspection and termination.
• Lead-based paint addendum: Any home built before July 1978 must provide lead paint disclosures. This addendum addresses the presence of lead-based paint in the property. A certified expert can test for lead in the interior and exterior of the home. If you’re purchasing a property to rent, you must get the property certified per Maryland law, and provide the report to the tenant.
• Seller disclosure addendum: This addendum requires the seller to disclose any known defects in the property.
• Home Sale or Lease Contingency in Maryland protects you in case you need to sell your home or lease your home as a condition to buy the new home you just made an offer on.
• Survey addendum: This addendum requires the seller to provide a survey of the property to the buyer.
• Title insurance addendum: This addendum clarifies the buyer’s responsibility for title insurance.
• Closing costs addendum: This addendum specifies which party is responsible for paying closing costs.
• Short sale addendum:  A short sale takes place when the seller must sell due to a hardship, but has a mortgage balance higher than the value of the home. He must negotiate with the bank and apply for a short sale. The seller must include the short sale addendum, which states that the buyer’s offer is based on the seller getting approved for the short sale.

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Jurisdictional Addenda

There are various addenda that are used in different counties and cities throughout Maryland. Some common ones are:

Frederick County Addenda:

• Right to Farm Real Estate Transfer Disclosure Statement:  This addendum is required for properties located in areas that are subject to the Right to Farm Ordinance and includes disclosures about the agricultural practices that may be conducted on the property.
• Private Water System Notice And Addendum: This addendum is required for properties that are serviced by a private well and includes disclosures about the water quality and availability.
• Septic System Notice and Addendum:  This addendum is required for properties that are serviced by a private septic system.
• City of Frederick Disclosure Statement:  This addendum is required for properties that are located in the Frederick city limits.

Montgomery County Addenda

• Montgomery County Jurisdictional Addendum: This addendum includes a number of notices and disclosures that are required by law in Montgomery County, referred to as the REA.
• Master Plan Disclosures: This addendum requires the seller to disclose the location of the property within the Montgomery County Master Plan and to provide the buyer with a copy of the Master Plan. The Master Plan is a document that outlines the county’s long-term goals for land use and development.
• Critical Areas Addendum: This addendum requires the seller to disclose if the property is located in a Critical Area, which is an area that is subject to additional zoning and land use regulations. Critical Areas in Montgomery County include areas that are adjacent to waterways, wetlands, and steep slopes.
• Foreign Investment Tax Act (FIRPTA) Addendum: This addendum requires the seller to disclose if they are a foreign person, which is a person who is not a U.S. citizen or a permanent resident. If the seller is a foreign person, they may be required to pay additional taxes on the sale of the property.
• Tacoma Park City Disclosures:  The city has it’s own set of disclosures

Miscellaneous Addenda

There are a few addenda that address the Chesapeake Bay and waterways in Maryland. These addenda are typically used in real estate transactions for properties that are located near or on waterways.

• Chesapeake Bay Critical Area Addendum: This addendum is required for properties that are located in a Chesapeake Bay Critical Area. Critical Areas are areas that are subject to additional zoning and land use regulations to protect the Chesapeake Bay.
• Wetlands Addendum: This addendum is required for properties that contain wetlands. Wetlands are important for flood control, water quality, and wildlife habitat. The Wetlands Addendum discloses the presence of wetlands on the property and the potential restrictions on development.
• Floodplain Addendum: This addendum is required for properties that are located in a floodplain. Floodplains are areas that are prone to flooding. The Floodplain Addendum discloses the flood risk for the property and the potential financial consequences of flooding.
• Waterfront Property Addendum: This addendum is used for properties that have direct access to a waterway. The Waterfront Property Addendum discloses the potential risks and hazards associated with owning waterfront property, such as flooding, erosion, and pollution.

Several counties have a Right to Farm disclosure, including Carroll, Garrett, Harford, Howard, Montgomery, Prince George’s, Queen Anne’s, St. Mary’s, and Washington Counties. The right to farm disclosure is important for both buyers and sellers. Buyers need to be aware of the potential inconveniences or discomforts that may be associated with living near a farm, such as noise, machinery, odor, and dust. Sellers need to be aware of their legal obligations to operate their farms in accordance with generally accepted agricultural practices.

Time is of the Essence with Contingencies in Real Estate

The clock starts ticking with a fully executed contract…all terms are agreed-upon and all signatures and initials are complete. Day one is the first day after the contract is complete.

Each contingency has a timeframe, or deadline, written in the appropriate addendum. All inspections must be completed by the date specified. If there are any responses and negotiations surrounding the results of the inspections, those will also have dates attached.

Differences in Terminology: Contingencies and Addenda

It is important for buyers and sellers to understand the contingencies and addenda that are included in their real estate contract. This will help them to make informed decisions about the transaction and to protect their interests.

• Contingency: A contingency in a real estate contract is a clause that allows one or both parties to back out of the deal if certain specified conditions are not met. In other words, the sale is contingent upon these conditions.
• Addendum: An addendum is a document that adds additional terms or conditions to a real estate contract. It can be used to clarify or modify the terms of the contract, or to address specific issues that are relevant to the property.
• Addenda can be used to clarify or modify the terms of a real estate contract. This can be helpful if there are any specific issues that are relevant to the property, such as the presence of lead-based paint or the location of the property in a floodplain. Addenda can also be used to address any changes that are made to the contract after it is signed.
• Addenda can help to protect both buyers and sellers from unforeseen circumstances. For example, an addendum may be used to specify the buyer’s responsibility for closing costs or to address the potential for flooding. This can help to protect both parties from financial losses if something unexpected happens.

Both contingencies and addenda are important because they can help to protect both buyers and sellers in a real estate transaction. For buyers, contingencies can help to ensure that they are not purchasing a home that is not worth the price or that has major defects. For sellers, contingencies can help to protect them from buyers who may back out of the deal for any reason.

Overall, understanding contingencies in real estate and the corresponding addenda is important for both buyers and sellers in a real estate transaction. By understanding these clauses, buyers and sellers can make informed decisions about the transaction and protect their interests.

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