What Are Real Estate Contingencies?
Do you know the most common real estate contingencies? How about what does a contingency mean in real estate? In the shortest answer possible, a contingency clause defines a condition that MUST be met for the agreement actually to become binding. Without this condition being complete, essentially, the whole agreement is void.
However, a contingency has to be first agreed upon by both parties and signed in the contract. In the case of real estate, this is the seller and the buyer. There are quite a few contingencies to cover in real estate sales which is exactly what we will do.
It is crucial to understand what you may be getting into if you sign a contract with a contingency clause, as you may think that things are almost finalized and done, but in fact, this may not be the case. Contingencies in real estate contracts appear regularly, so it vital to understand them.
This article will go over the commonly used real estate contingency clauses used every day in property contracts and how they benefit the seller and the buyer, depending on the scenario.
Let’s Talk Real Estate Contracts…
We want to detail what property contracts and their process, so then when we give you information on contingency clauses, it will make much more sense if you do not know the process already.
It all starts with an offer; an interested purchaser presents a sum to a seller for their property, who can accept or decline based on what they are looking for. It is rare proposals are immediately rejected and forgotten about unless it is some ridiculously low offer below what the seller was looking for.
Often, the initial offer will be countered, and negations may continue for a while until both parties reach some agreement.
Of course, if both parties can not agree, then the terms and the offer become void, and both parties go on without further contact to find something else that will satisfy them.
Now, let’s assume that an agreement has been met; sometimes, this may include a contingency clause…
What a Contingency Clause is in a Home Purchase Contract
A contingency clause may come with the offer made to the seller to purchase their real estate and will be included in the proper contract. In layman’s terms, it essentially allows a party to back out of the sale if the clause has not been met by either party, depending on the terms of the contingency.
Although these things will, of course, need to be understood by both parties, so they know what they’re getting themselves into. Contingencies can include a detailed time frame, such as giving the buyer X amount of days to check over the property or the number of days to apply for financing.
As we’ve already mentioned, if the contingency rules are not completed, then one of the parties (which in most cases is the purchaser) can back out without further legal action.
On the other hand, if the contingency is met and a party still wants to back out, it’s legally enforceable, which means the party backing out can be pursued by further legal action. The consequences of backing out of a contract can vary, but the deposit is often the seller's sole remedy in law and equity.
When a seller tries to back out of a sale, a buyer can sue for specific performance.
Different Contingency Clauses Available to Sellers and Buyers
Now you understand the main mechanics behind contingency clauses and their ultimate purpose in home purchase contracts, let’s cover different clauses available to both the seller and the buyer. You could easily find one of these contingencies in your purchase and sale contract the next time you come to sell or buy a home.
Appraisal Contingency
Part of the process of getting a loan has the home you're buying appraised by the lender. An appraisal contingency is there to safeguard the purchase and ensure the home in question isn't being purchased for more than the property is worth. If the property, when looked at by the appraiser, comes in less than the agreed-upon sales price, the buyer may be able to escape the contract.
I will come down to how the language in the appraisal contingency is worded. In almost all cases, the earnest money will be returned to the buyer if they do not wish to proceed.
The seller, however, typically will have the chance to lower the cost of the home to the appraised amount, so the sale can still go forward as planned. In some cases, there is a compromise made between the buyer and seller. The buyer would increase their down payment, and the seller would reduce the price somewhat.
In cases where the home does not appraise, the lender needs to be satisfied with what the buyer and seller have agreed to. All the bank cares about is whether they will be protected or not. Banks do not want to lend money on properties where there is not the right equity amount.
No matter the determined value, it’s still the buyer’s job to let the seller know the amount so that they both know the steps going forward, whether the buyer is backing out or going forward with the purchase.
If the buyer does not let the seller know by the date specified in the contingency, the buyer's contingency will no longer be in force.
Financing Contingency
A finance contingency, or as it’s also known, a mortgage contingency, gives the purchases time to secure the funding required to buy the property they are putting an offer on.
This protects the buyer as it lets them back out of purchasing a property. If they cannot secure the right amount of funding, they can also get back the earnest money they may have put down.
With this clause, there will be a specified amount of days in that the purchaser has to obtain the correct amount of funding to purchase the property. The purchaser has until this date to void the contract if they do not get the funding they need.
They can, during this time, request an extension to give them more time, but this has to be in writing and once again needs to be accepted by both parties.
If the purchaser does not terminate the contract during whatever time period agreed, then the contingency is waved, and then the buyer must purchase the property, even if they did not get the funding they needed. If they do not move forward by the agreed-upon closing date, they will lose their deposit monies.
Home Sale Contingency
Although it’s usually easier to get your home sold before you can buy another property, not all cases are the same, and sometimes things don't always fall into place as both parties would like.
A home sale clause, in this case, is used so that the purchaser has a set amount of time to sell their current home so that they can finance their new one.
A home sale contingency protects the buyer in the event they are not able to sell their home. The home sale clause allows the buyer to terminate the contract if they cannot successfully sell their property.
The home sale contingency clause is not looked at favorably by most sellers as it takes all the risk away from the buyer. A seller cannot make any concrete plans as they really do not have their home sold even though they have an accepted contract.
House sale contingencies can be bad news for a seller since they are forced to decline another offer that comes in on their home once the contract with the contingency has been accepted. Home sale contingencies should have a specified time frame where it becomes void if a buyer cannot find a purchaser for their home.
Home Inspection Contingency
An inspection contingency gives the purchaser the option to have the property examined inside a predetermined time span, such as seven to ten days. It ensures the purchaser has the property looked over by an expert who can determine any substantial issues. Buyers, sellers, and real estate agents are often keeping their fingers crossed there are no home inspection deal breakers.
A home inspector looks at the inside and outside of a property, carefully detailing the findings. The inspector will create a full report for the purchaser specifying any issues found during the assessment.
Once the inspection has been completed and based up the results, the buyer can:
- Can move ahead with the transaction.
- The buyer could ask for further inspections from qualified specialists to check issues brought up by the inspector.
- Can ask the seller to either make repairs to known issues.
- Can request the owner give them a monetary credit of some amount to take care of some or all of the problems.
- The buyer could also terminate the contract and get their escrow funds returned.
The initial home inspection contingency can sometimes include language. A buyer will not blackout the agreement unless the home inspection reveals problems greater in cost than some agreed-upon amount.
If the home inspection shows that the issues will require more money than this dollar sum, the buyer can void the contract if they wish.
Kick-Out Clause
A kick-out clause is a contingency added by sellers to safeguard themselves against the contingency we just spoke about - The home sale contingency.
While the sellers consent to this, they can add a kick-out clause expressing that they themselves can keep on promoting the property if they wish.
If another potential buyer submits an acceptable, the home seller can give the current purchaser a predetermined measure of time (in most cases 24-48 hours) to eliminate the home sale contingency and move forward with the transaction.
Otherwise, the seller is free to terminate the original agreement and offer the property to the new buyer who has just come along and put their own offer.
Miscellaneous Real Estate Contingencies
There could be any number of other different kinds of contingencies in a real estate contract. Maybe you are buying a piece of land, and you want to make it subject to getting a building permit. With a land purchase, there could be any number of things that could hold up buying that one-acre lot you have your heart set on, whether it is wetlands, high water table, or some other zoning constraint.
The contingency for purchase would allow you the ability to do your proper due diligence before moving forward. After all, that acre of land could be next to worthless if you can't build a house on it.
Final Thoughts on Real Estate Contingencies
A real estate contract is a legal and binding agreement in most circ*mstances. It is crucial for buyers and sellers to understand what they agree to. If there is any doubt at all, a real estate attorney should be consulted before signing.
Hopefully, you now have a much better understanding of the contingencies you can expect to see in a real estate contract. You should also have a firm grasp of what having a contingency means.
