In many real estate transactions, the term ‘contingency’ may come up. A contingency is a clause that is added to the contract that gives the parties the right to back out of the contract under certain circumstances that must be negotiated between the buyer and seller. Essentially, a contingency clause allows either the buyer or the seller to back out of the sale without any kind of repercussions or breach of contract. For the majority of real estate transactions, most contingencies are for the benefit of the buyer. It’s important to know the most common contingencies that could come up in your next home sale or purchase.
For home purchases that require funding, an appraisal is required to determine the overall value of the home. The lender won’t lend more than what a home appraises at, so should an appraisal come in lower than asking price, a problem arises if a buyer doesn’t have the cash to make up the difference. For this scenario, an appraisal contingency is helpful: it allows the buyer(s) to back out of a deal if the appraisal price is not as high as the purchase price, or it allows the buyer and seller to re-negotiate the purchase price, giving the buyer the ability to back out of the deal if the seller declines to come down in price.
The buyer is responsible for funding the home purchase, whether it be with cash, mortgage loan or some kind of other funding. If the purchase is dependent on financing a loan, then a financing contingency will likely be included in the contract. A financing contingency helps protect the buyer should the loan not come through. This contingency can also include other details regarding the purchase, like the type of loan, the amount of the down payment, loan term and even the interest rate. This is an important contingency in that it protects the buyer, allowing him/her to walk away from the deal without any repercussions or loss of earnest deposit, which is incredibly valuable to the buyer.
Home Inspection Contingency
One of the most important protection contingencies, the home inspection is a huge part of the home buying process. The inspection is performed by the buyer in order to ensure the property is sound. A home inspection does a great job at determining the overall condition of the property, helping pinpoint any major issues. The buyer has a lot of protection with a home inspection contingency, especially if major items come up in the inspection report. With a home inspection contingency, the buyer can: ask for a discount to help with any necessary repairs, go through with the sale regardless of the findings and do the repairs after moving in, or back out of the deal based on the findings without any negative repercussions.
Home Insurance Contingency
Home insurance is important: it provides protection for things like property damage, fires, natural disasters, and other issues. When it comes to a home insurance contingency, this could be a requirement that the buyer secures home insurance prior to finalizing the purchase. The contingency could be part of the loan agreement, put in place by the mortgage lender, or it could be something the seller dictates in the contract. This can be a tricky one (especially if insurance is needed prior to closing) if the property is located in an area where insurance is difficult to get, like a known flood zone or other region that experiences inclement weather and/or natural disasters.
Home Sale Contingency
For those buyers who are also selling their own home, a home sale contingency is usually inserted into the contract. Basically, this contingency is “I want to buy your house, but I can’t until my house sells.” Properties listed as “under contract” or “contingent offer” likely have a home sale contingency on them. The homes are still open for offers, but the contingency clause will likely have a stated amount of time for the original offer maker to sell his/her home before the seller can accept new offers.
Contingencies are common in real estate, and they’re not a bad thing: they help protect both buyers and sellers. If you have questions about contingencies, or about real estate in general, contact your local agent for more information!