Real Estate Contingencies
What are they?
A contingency is a clause placed in a purchase and sale agreement (real estate contract) that defines a specific condition that must be met in order for the agreement to be fulfilled.
Contingencies offer protection to a buyer and/or seller in the event a specific contingency requirement is not achieved. The terms of a contingency define a specific date or period of time that the contingency must be completed by. An example of a contingency is when earnest money must be deposited by the buyer within a certain timeframe, as outlined in the contract. For this contingency, the contract language provides a seller the option to void the contract in the event earnest money is not deposited by the buyer. We’ll discuss the most common contingencies and their potential outcomes below.
Financing Contingency. Buyers who are obtaining a mortgage benefit from including a Financing Contingency in their offer. The Financing Contingency provides a buyer the time to secure mortgage financing from a reputable lender. The financing contingency protects buyers in the event they are not successful in obtaining a mortgage. In this event, the buyer could provide evidence of the loan application results to the seller and be able to walk away from the purchase and retain any earnest money.
Seller Home Disclosure. A buyer may choose to incorporate a Home Disclosure contingency into their offer contract. The Home Disclosure contingency would make the buyer’s purchase contingent upon the buyer reviewing and accepting a home disclosure to be completed by the seller. Under this contingency, items that would require disclosure from the seller include water damage, foundation cracking, work to the home that was completed without a permit, easement disputes, and similar material issues. If the completed disclosure form brings to light information that is of serious concern to the buyer, the buyer would have the option to walk away from the purchase and retain their earnest money.
Home Inspection Contingency. A Home Inspection contingency provides an opportunity for the buyer to hire a professional inspection of the home. Inspectors will visit the home and determine the condition of most items; inspectors will then provide a professional inspection report. In the event a concern is identified during the inspection process, the home inspection contingency would provide the buyer an opportunity to work with the seller to resolve the concern. If the concern is serious enough, the buyer could walk away from the purchase and get any earnest money refunded.
Home Appraisal. A Home Appraisal contingency allows a buyer’s offer to be contingent upon the results of a professional third party appraisal. The appraisal contingency may protect a buyer from overpaying for a home. Mortgage lenders require home appraisals in order to verify that the property is worth the amount the buyer is willing to pay.
In some cases, a home will appraise for less than the purchase price. When the value of a home is appraised for less than the purchase price, most lenders will require the buyer to fund the difference. For cash buyers, an appraisal provides an additional point of reference for the purchase price.
Title Report. Buyers should make their offers contingent upon the review of a Title Report. In real estate, Title is a document that contains all of the known rights to a property, including listing the current owner of the home. A title report will identify any title defects or concerns, such as an easement on the property, or that another party has rights to a portion of the property. Buyers should utilize the Title Company to explain the outcome of their Title Report.
Sale of Current Home. If a buyer is purchasing a home while simultaneously selling their current home, a Sale of Current Home contingency provision will allow the new transaction to be dependent upon the successful sale of their existing home. If the buyer is unsuccessful in selling their current property, the buyer would no longer be obligated to purchase the new home.
Three outcomes of a contingency
Contingency can be satisfied. A contingency may be successfully satisfied by completion of the requirement that the contract is contingent upon. Once the requirement is satisfied, the beneficiary of the contingency may communicate to the other party that such contingency has been satisfied and is no longer required. For example, a home inspection contingency would be satisfied once the buyer obtains the home inspection report, is comfortable with its findings, and lets the seller know that the home inspection was successful and the contingency has been satisfied.
Contingency can be waived or removed. In most cases, a buyer has a certain period of time to object to a contingency. If the buyer does not object by the deadline, the contingency is deemed to be waived and the pending sale is no longer subject to cancellation or negotiation due to that contingency item. For example, a title report contingency would be satisfied by the buyer once the buyer’s deadline to object to the title report contingency has passed. Note that even if a buyer has not reviewed the title report, a buyer must communicate to the seller within the proper contingency time period. When the time period for the contingency expires the contingency is deemed to be waived. Be sure to communicate within the designated contingency time period to avoid waiving a contingency by mistake.
Contingency can be objected to. In the event that a contingency item is of concern, the beneficiary of the contingency may object to the contingency item by communicating the objection to the other party. For example, a buyer with a home inspection contingency receives an inspection report indicating a concern with the foundation of the home being purchased. In this example, the buyer, as a result of the inspection report, is no longer interested in buying the home. The buyer would communicate their objection to the seller, prior to the contingency deadline, and provide a copy of the inspection report to the seller. The buyer would then be entitled to walk away from the purchase while retaining their earnest money deposit.
Contingencies are standard in all real estate contracts; including for sale by owner. Contingencies can protect buyers and sellers by ensuring the terms necessary to close the transaction are met. Buyers should be aware that for a seller, receiving an offer with fewer contingencies is more attractive than an offer with a large number of contingencies. For sellers, having fewer contingencies usually indicates a greater likelihood that the transaction will close as planned. When a contingency is included in a contract and an associated deadline is set, the party benefiting from the contingency may object by the deadline. If there is not an objection, the contingency will be waived and the transaction will proceed forward as normal.
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