Contingencies in Real Estate Explained
Do you know what a real estate contingency is and how it works? Real Estate contingencies are when some defined action or outcome must occur before a contract becomes legal and binding.
From a buyer’s perspective, a real estate contingency is an escape clause that can be used under defined circumstances. We will take an in-depth look at the most common real estate contingencies you need to understand when buying a home.
Many buyers and sellers are not well educated about the intricacy of some real estate contingency clauses. Given they are significant legal terms in a purchase and sale, it is essential to have a strong working knowledge of how they work.
Some of these clauses can benefit you when purchasing a home, so we will look at some of the contingency clauses you might encounter when buying a property.
If you are buying your first house, it will be especially beneficial to understand real estate contingencies.
What Are The Most Common Real Estate Contingencies
These are some of the clauses that you may encounter when buying a house. The home buying contingencies below should be completely understood before signing on the dotted line of a purchase and sale agreement.
- Home inspection: often called a due diligence contingency, will give the buyer rights to have the house inspected. Most buyers will have a home inspection contingency in their contract. In extreme seller’s real estate markets, it is not uncommon for buyers to waive a home inspection as a way of sweetening their offer.
- Obtaining financing: allows the purchaser to get the funds to buy the property from a lender of their choice. Unless a buyer is paying cash, the mortgage contingency clause is almost always found in a purchase and sale agreement.
- Appraisal Contingency: You are waiting for a valuation and getting your loan from the bank. You need the real estate appraisal to be at a specified amount. An appraisal contingency will protect you by ensuring the property is valued at the minimum amount required by the borrower. Licensed real estate appraisers conduct appraisals that are hired by the lender.
- Association contingency - if there is a homeowners association, there will often be a clause stating the purchase is subject to the successful review of the association documents and financials. Buyers will want to make sure they are comfortable with all of the rules and that the HOA is financially stable.
These contingencies need to be met for a contract to become ratified and binding. While these contingencies are waiting to be performed, the property is considered a contingent house listing. It will be marked in the multiple listing as “contingent” until all the contingencies are satisfied.
When a condition or action is defined, it must be met for the contract to be binding. If these conditions are not met in a purchase contract, one of the parties may decide to terminate the agreement. The meaning of contingent has slight variation differences from state to state, so check with your real estate agent for clarification.
Real Estate Contingencies Explained
Once conditions are met, this makes the contract enforceable, and it is too late to back out without incurring legal consequences. This could involve losing part or all of your earnest money deposit. Many real estate contracts will have earnest money as the relief a seller can get for a buyer not proceeding with a contract.
- An appraisal contingency protects the purchaser by ensuring the appraisal is at a specific figure for purchase to proceed. The purchase price of the home is usually the threshold that must be met.
- A financing contingency gives the buyer time to raise funds for the purchase, and if they can’t raise funds, they can be released from the contract without penalty. The mortgage contingency clause will specify how much the buyer is borrowing and when they need to procure their financing.
- Home sale contingency is put in place when the buyer has not yet sold their own home. Purchasing is contingent on making the sale first. If you are the homeowner awaiting purchase, you may want to put a time limit on this clause when signing the contract. You won’t want it to drag on for months and miss out on other buyers. Home sale contingencies are often frowned upon due to their risky nature.
- The inspection contingency is contingent on a satisfactory house inspection report. The purchaser will need to be sure that there are no major expenditures required immediately, like a new roof. If a new roof was required, it might cause the buyer to terminate the contract or alternately to ask the seller to pay for it.
- A homeowners association’s document contingency gives you the right to back out of the sale if you find something in the documentation that is not to your satisfaction. Quite often, it could be finding out that the neighborhood is not doing well from a financial standpoint.
Additional Contingencies in Real Estate Sales
What is a Kick-Out Clause
A buyer or seller can add the kick-out clause to protect against the house sale contingency. If a better offer comes along, a seller can move forward on a purchase agreement with a new buyer after giving the first buyer notice. The buyer with the kick-out clause in place will need to decide on moving forward in a specified amount of time. The time for a decision in a kick-out clause is usually 24-48 hours.
If the buyer does not exercise their right to move forward, the seller can move forward with a contract with buyer #2.
When working with a kick-out clause, it is not a bad idea to consult with a local attorney on crafting appropriate language. A kick-out clause is similar to the right of first refusal found in some real estate contracts.
Why You Should Pay Attention to Contingency Clauses
Real estate purchase and sale agreements are legal contracts. You must understand the details when buying and selling. Not only are huge amounts of money involved, but there is often an emotional investment as well.
Contingency clauses are there to protect you, whether you are buying or selling.
When you buy your house, the contract may say contingent on quite a few things. It is essential to work with an excellent buyer’s agent who will carefully craft appropriate contingencies to be inserted into the contract.
Whether it is a financing clause, home inspection, or some other contingency, it is crucial to stay on top of dates. You will need to make sure you follow all the designated contingency dates, so you stay within your deadlines.
By not providing notice by specified deadlines could leave you open to losing your deposits.
Contingencies Can Benefit Buyers and Sellers
You can make contingencies work for you whether you are selling or buying, as you want your transaction to run as smoothly as possible and complete in time.
So once you sell, there will be contingencies in place in the contract. A contingency is actually a condition that allows everything to move forward to completion. So it is useful when you are purchasing to have some specific contingencies in place to protect you.
Final Thoughts on Real Estate Contingencies
A contingency clearly states expectations and dates. Both buyers and sellers should have a clear understanding of all real estate contingencies meaning. Not understanding a real estate contingency could either cause problems in your transaction or, in a worst-case scenario, a loss of funds.
It is especially important for first-time home buyers to have a firm grasp of common home buying contingency clauses.
Hopefully, you now have a better understanding of common real estate contingencies when buying a home.
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