Five Common Contingencies in Real Estate Contracts

Contingency Clauses

A contingency clause is a condition that must be met in order for a real estate contract to become binding. To become part of the sales contract, both parties (the buyer and the seller) must agree to the terms and sign off on the contract. Some of the most common contingencies included in real estate contracts are:

1. Financing contingency

A financing contingency, or a mortgage contingency, gives the buyer time to apply for and obtain financing to purchase the property. This contingency protects the buyer by giving them the ability to back out of the contract. It also allows them to reclaim their earnest money if they are unable to secure any financing. A financing contingency will state a specific number of days the buyer has to obtain their financing. They have until this date to terminate the contract if need be. If the buyer does not back out of the contract after the specified date, they are obligated to purchase the property, even if they don’t have a loan secured.

2. Home appraisal contingency

Mortgage lenders often use a home appraisal contingency to ensure that the property is worth the amount the buyer has agreed to pay. A home appraisal evaluates the home’s market value based on certain characteristics. These include the condition of the home, square footage, number of rooms, and the recent selling price of comparable homes. This contingency gives the buyer the chance to renegotiate the purchase price to better reflect the home appraisal or to back out of the deal entirely.

3. Home inspection contingency

The home inspection contingency is one of the most common real estate contract contingencies. It allows the buyer to back out of the home purchase should they be unhappy with the inspection results. A home inspection assesses the overall condition of the home and determines any necessary repairs and any major health and safety concerns. Minor issues, such as a leaky faucet, can be repaired by the seller before the closing. However, other issues may be more severe and harder to fix, such as issues with the home’s foundation.

4. Clear title contingency

The title is the legal document that shows who has owned the home in the past and who currently owns the home. Prior to the purchase of a home, a title company will check the title to ensure that it is clear of any liens, disputes, or other similar issues. Most title issues can be solved between the purchase agreement and the final closing. However, there are some that are more problematic. In these cases, the clear title contingency allows the buyer to back out of the purchase.

5. House sale contingency

A home sale contingency makes the sale of the home contingent on the sale of the buyer’s current home. If a buyer is unable to sell their current home, they have a way out of the purchase contract. However, sellers are often reluctant to accept this kind of offer. In a seller’s market, it is even less likely that a house sale contingency will be accepted. This is because there are more buyers competing in the market.

Should contingencies always be used?

All contingencies shouldn’t be used at once. It is a good idea to include the home inspection contingency in your contract. However, contingencies can often make your offer less appealing to sellers. This is especially true in a hot market when there are a lot of buyers and not a lot of houses for sale. Be aware of the market situation you are in to get a better understanding of which contingencies you should include in your contract.