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.
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.
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
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.
Challenges with contingencies
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.