Understanding 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 would 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.

Contingencies 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.

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

There are several contingencies that are common.

COMMON CONTINGENCIES

• Financing Contingency:  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. 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 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:  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.

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.