Understanding Contingencies in Real Estate Contracts

Contingencies are a common occurrence in real estate transactions. They simply mean the sale and purchase of a house will only happen if certain conditions are met. The offer is made and accepted, but either party can legally back out if those conditions aren’t satisfied. 

Several real estate contingencies won’t affect the views of sellers. Contingencies such as the financing, home inspection, title and appraisal contingency are presented in almost every contract, especially with buyers that are obtaining loans, and will not raise any suspicion. Venturing away from these common-sense contingencies could raise red flags, while waiving these contingencies could make an offer more tempting.

Financing Contingency

If the buyer is obtaining a mortgage this clause states the offer is contingent on their ability to obtain the loan, and it will specify the type of financing, terms, and the amount of time in which they have to be approved for the loan.

The financing contingency is important for many reasons. One of the biggest reasons is in the event the buyer's loan falls through at the last minute, and they are unable to secure financing in time. This ruling will allow them to walk away from the deal without repercussions or loss of earnest deposit. Consequently, this contingency is another reason why sellers prefer to do business with all-cash buyers.

Home Inspection Contingency

Far and away, the home inspection is one of the more important protection contingencies of a real estate contract. This period of due diligence, which will often range from three to 14 days, allows the buyer a period of time to conduct inspections on the property to ensure the property is up to their buying standards. A home inspection will provide the buyer will a detailed report of the property and outline any repairs and future issues that may arise.

This stipulation provides the buyer and seller three options: accept the home in the current condition, renegotiate with the ability to end the deal if an agreement is not met, or back out of the deal all together.

Title Contingency

A real estate attorney or title company will do a title search on the property during the home buying process. The title serves as a record of homeownership and is essential to the sale of the property. In most cases, any issues with the title can be resolved before the closing process. However, in some cases, this situation could lead to several challenges for the potential new homeowners. A few examples include a lien on the property that must be paid before the sale, or perhaps an ownership dispute if the seller cannot legally prove they own the property. A title contingency protects potential owners from these situations by allowing them the opportunity to walk away if these issues are not resolved before closing.

Appraisal Contingency

And lastly, the appraisal contingency which is also tied to buyers who are obtaining a mortgage. A licensed appraiser will estimate the home’s value and produce a written report with an appraised value attached. The amount of money a bank loans will be based on the appraisal value of the property. If the appraisal amount is lower than the home price, the buyer is responsible for making up the difference. For example, if a home appraisal comes in at $400,000, and the asking price is $425,000, the bank will only loan up to $400,000.

This stipulation essentially awards buyers and sellers two options after the appraisal: renegotiate the purchase price with the ability to end a deal if an agreement is not met, or back out of a deal if the appraisal price on a property is not as high as the purchase price. Once again, this contingency is another reason why sellers prefer to do business with all-cash buyers.

Contingencies are quite common, however, they can cause an offer to be weaker than a non-contingent offer. As any home seller will tell you, a clean, non-contingent offer is attractive and often favored over contingent ones. The home sale process moves much more smoothly and quickly without these contingencies tied to them. Fewer roadblocks means less stress for both the buyer and the seller.

These contingencies can be waived to make an offer more favorable to a seller, though it can be risky for some buyers. This will be talked about in more depth in a future article.