A contingency is an action or condition that needs to be met before a real estate transaction becomes legal and binding. Real estate contingencies have become an integral part of a buying transaction and can keep the involved parties from making costly mistakes. In basic terms, a buying contingency gives the buyer the right to terminate the contract under certain parameters that are negotiated beforehand between the buyer and the seller. If the conditions of the contingency are not met, the buyer can back out without consequence.
On the other hand, the contract will become legally enforceable if the contingency is met, and the buyer would be in breach of the contract if they decided to back out. The length of a contingency period varies depending on the type of contingency. For example, an inspection contingency period may only last a week, while a financing contingency period lasts anywhere from 30 to 60 days. Any contingency should be clearly outlined and written to be legally binding. We have outlined some of the common buying contingencies to help you navigate the home buying process with confidence.
Appraisal contingency
An appraisal contingency helps ensure that a property is valued at a previously determined minimum amount. This protects the buyer. If the property does not appraise for at least the amount specified in the contingency, the contract may be terminated. The appraisal contingency may include terms that allow the buyer to proceed with the purchase even if the appraisal is below the specified amount, typically when it is within a certain number of days after the buyer receives the notice of the appraisal value. This contingency identifies a date on which the buyer must notify the seller if there are any issues with the appraisal. Otherwise, the contingency will be declared satisfied and the buyer will have to go through with the transaction.
Financing contingency
Another type of buying contingency is a financing or mortgage contingency. This gives the buyer time to apply for and obtain financing for the purchase of the home. It also provides the buyer the ability to back out from the contract and reclaim their earnest money if they are unable to secure financing from a bank, mortgage broker, or another kind of lender. This type of contingency will give the buyer a certain number of days to obtain financing and the buyer has until this date to terminate the contract or request an extension. Otherwise, the buyer automatically waives the contingency and becomes obligated to purchase the property, loan or not.
Home sale contingency
It may seem more ideal to sell your home before buying another, but occasionally the timing and financing do not necessarily align. A home sale contingency gives the buyer a specified amount of time to sell their existing home in order to finance the new one. With this kind of contingency, if the existing home does not sell for at least the asking price, the buyer is able to back out of the new contract without legal consequences. These contingencies can be tough for the seller. They may be forced to pass up another offer while waiting for the outcome of the current contingency, but they are typically able to cancel the contract if the buyer’s home is not sold within a specified timeframe.
Inspection contingency
An inspection contingency, or due diligence contingency, gives the buyer the right to have the home inspected within a specified time period, usually about a week. Depending on the findings obtained by a professional home inspector, the buyer has the ability to back out of the sale. If the buyer approves of the report provided by the inspector, the deal can move forward. If they disapprove of the results of the report, the buyer can back out of the deal and have the earnest money refunded or request repairs or a concession. If the seller agrees, the deal can move forward, but if the seller refuses, the buyer has the ability to back out of the deal.
Additionally, a cost-of-repair contingency is sometimes included in addition to the inspection contingency and provides an outline of the dollar amount allotted for the necessary repairs. If the inspection report comes up with repairs that will cost more than this number, the buyer can decide to back out.
Kick-out clause
A kick-out clause is a contingency that sellers add to protect themselves from a home sale contingency. They may agree to the house sale contingency, but adding the kick-out clause allows them to continue to market the property. This way, if another qualified buyer makes an offer, the seller can give the current buyer a certain amount of time to remove the house sale contingency and keep the contract in motion. Otherwise, the seller will be able to back out of the contract and move on to the new buyer.
Challenges with contingencies
Contingencies can often become an additional source of stress for all parties involved when going through the home buying process is often stressful enough as it is. If a buyer cannot get the home inspected before the inspection contingency deadline, they must decide if they will move forward without the inspection or attempt to extend the deadline. If the seller accepts extensions, it may interfere with their plans.
Of course, there is risk involved when including contingencies. Too many contingencies may lead to a rejected offer. The seller may not accept the buyer’s contingencies or they may be too restrictive. If you are attempting to buy in a market where you are likely competing with other buyers, work with your real estate agent to decide on contingencies you want to include in your offer.
Contingencies are an important part of a real estate transaction. The contract defines the roles and obligations of both the buyer and the seller and ensures both are held accountable in a legally binding way. Be aware of appropriate contingencies and pay attention to the specified dates and deadlines.
This may seem a bit overwhelming, but Mike Knoll has the knowledge and experience to walk you through every step of the home buying process. Contact us today to get started!
