The Real Estate Contingency Explained
The definition of a contingency is an action or condition that needs to be met for a real estate contract to become legal and binding. Real Estate contingencies become an integral part of most contracts. If you are going to be buying or selling a home, there are real estate contingencies you should know.
Whether you are buying a home to live in or investing in property for a return, real estate contingencies can help you avoid a costly mistake. Contingencies in real estate give you more control over the home buying process with a get-out clause if things don’t go as expected.
Purchasing a property involves entering into a legally binding contract with the seller, so you need to know about home buying contingencies and how they are applied.
With a better understanding of the real estate contingency process, you can enter home purchase negotiations with more confidence and knowledge. If you are a first-time homebuyer, it will be beneficial.
Our guide should give you the information you need to navigate contingencies in real estate deals successfully. Let’s take an in-depth look.
What is a Real Estate Contingency Contract?
As previously mentioned, a contingency in the purchase and sales agreement means that certain things must be completed for the home purchase to continue. An action has to occur to allow the contract to become binding and the sale to head towards closing.
While the real estate contingency offers protection to buyers, it isn’t without its downsides. Contingencies can slow down the home buying process and make it more difficult to negotiate the purchase contract.
The home seller is more likely to want to deal with buyers who have fewer contingencies, as it offers less risk and speeds up the sale for them.
Not every home purchase is the same. In some cases, it will be better to have more contingencies than in others.
What’s Found in Real Estate Purchase and Sale Contracts
Generally, contracts to purchase real estate need to include certain important details about what is expected to happen and when. These will include:
- The names of the parties involved, i.e., the buyer and seller.
- The address of the property and description of the home.
- The real estate companies involved in the sale, if there are any.
- The offer price that’s been agreed upon by the seller.
- The amount of the earnest money deposit.
- Who is holding the earnest money?
- The amount of the buyer’s down payment.
- The mortgage amount the buyer is financing.
- When the buyer needs to apply for their mortgage.
- The date by which the buyer needs to have their mortgage commitment.
- Additional terms of the sale.
- The final walkthrough date.
- The anticipated closing date.
- Any Real Estate contingencies – below, we will discuss what are typical contingencies in a purchase and sales.
Homebuyers can add contingencies to the contract to suit their situation and their requirements.
Contingency Contract Rules
The contingency is a clause that needs to be met by either the buyer or the seller or both to continue with the sale. If necessary, you can negotiate with the seller over the contingencies applied to the contract. This should ensure that you are protected during the purchase of the home, and the seller is happy with the arrangement.
It is advantageous to understand how contingencies work to avoid confusion and think you need to push for certain contingencies that aren’t really important or necessary to the situation.
Contingencies are conditional; the contingency will remain valid as long as the specified task is completed in the time period allowed. If the conditions aren’t stuck to or completed in time, the purchase contract will not continue to apply.
Set a deadline; with home sales often needing to be completed by a set time, deadlines need to feature in contingencies. This should ensure the process continues to move forward with less chance of unnecessary delays. Both the buyer and seller can be held accountable for any delays if there are clear deadlines to meet.
The real estate contingency needs to be specific; the contingency details have to be exact in describing what needs to happen. They cannot simply be a general wish for some action to take place. The clause needs to state exactly what outcome has to be met so that there isn’t any doubt about whether the contingency has been completed.
Ensure the agreement is binding; without a binding contract, there is less requirement to stick to the terms. A binding contract will ensure that both the buyer and the seller know their responsibilities and carry them out. There also needs to be a plan for what to do if these obligations are not met.
Common Real Estate Contingency Options
Let’s look in more detail at some of the contingencies you might consider adding to the real estate contract. These are the most common contingencies in a real estate contract. While the time frame for getting real estate contingencies can be done is negotiable, it often is ten days. When someone asks what is a ten-day contingency in real estate, this is what they are referring to.
It is also known as the real estate contingency period.
The Home Inspection Contingency
Every buyer should use a home inspector’s services to ensure they aren’t buying a property that will be more trouble than it’s worth. The home inspection contingency is vital to protect the buyer’s interests and make sure they have enough time for the property to be assessed. You can see an excellent home inspection checklist as a buyer or a seller to become intimately familiar with the home inspection process.
The contract will set out a period of due diligence that can be up to a couple of weeks or just a few days. The purchaser needs to arrange for the home inspector to visit within this period. The home inspection result will give the buyer a report with details of the home and any problems the inspector uncovered.
What is checked during the home inspection can vary depending on the house and its location, but typically you can expect the inspector to cover certain possible problem areas. These include; structural issues, basement and foundations, plumbing and electrical systems, HVAC, pests, radon gas checks, and more.
Unless the house is virtually brand new, you can expect the inspector’s report to highlight some areas of concern. You will need to carefully consider if the issues revealed in the report are severe and costly enough to go back to the seller to renegotiate. There are a few options here. You can ask the seller to complete the repairs, negotiate a lower offer price for the home, or simply walk away from the deal. In most sales, there will be some negotiations of the home inspection.
Many of the things the inspector will find are likely to be fairly minor, and pushing for the seller to fix these or give you a discount for everything highlighted, might be unfair and unrealistic. This will only cause frustration with the seller, perhaps causing them to want to find another buyer.
If you are happy with the deal you negotiate with the seller, or the home inspector doesn’t find anything major, you can move on towards closing. The home inspection is one of the most common contingencies in real estate.
The Financing Contingency
For many people, a mortgage is crucial to them getting the house of their dreams. The financing contingency helps out buyers who don’t get the expected loan they need to purchase the home.
While they might have had pre-approval for a mortgage, something could have changed in their financial situation before they finally apply to the lender. Perhaps they have taken out another small loan or missed a payment, without realizing this could affect their credit score and their chances of getting the funding they thought they had already been approved for.
With a lower credit score, buyers could find they have trouble securing the loan they need to buy the home from any lender.
The mortgage contingency clause gives them a way to walk away from the purchase agreement without facing the problems of breaking the contract and losing their earnest deposit.
Here is a real estate contingency clause example for a buyer needing to procure financing:
In order to finance the purchase of the specified property, the buyer will apply for a mortgage loan of X amount of dollars at prevailing rates, terms, and conditions.
If despite the buyer’s diligent efforts, a commitment for a loan cannot be granted by X date, the buyer shall have the right to terminate this agreement by written notice to the seller or broker representing the seller. Notice shall be given before the expiration of such time, whereby all deposits made by the buyer shall be refunded.
For a buyer to get their deposit back, they would need to have notified the seller by the specified date. This is an excellent example of how consumers need to understand real estate contingencies and follow them properly. Not doing so could put you out of pocket for a lot of money.
The Appraisal Contingency
Another of the real estate contingencies you need to be familiar with is the appraisal. Lenders don’t like the prospect of loaning more money for the purchase of the property than the home is worth. They know that some of their customers will fail to keep up the mortgage payments and potentially enter foreclosure.
If they have loaned more money than the home is worth, they stand to lose out due to a foreclosure. Given this, they need an appraisal of the value of the home.
A professional and licensed appraiser will be given the responsibility of finding the true value of the property. They will visit the home, take measurements, take photographs, and assess the neighborhood. They will compare the property to other homes to get an accurate assessment of the fair market value. Many factors can influence appraised value.
The appraiser will create a report with their assessment of the market value. If the appraisal comes in lower than the price the buyer has agreed to pay for the home, there could be problems. This will mean that the buyer will have to find the difference in values, as the lender won’t loan the full amount. For many people, this will mean that they cannot continue with the purchase of the home.
While it is possible to dispute an appraisal valuation, you need evidence to support your claim, and they are rarely successful. The appraisal clause gives people in this difficult situation a way out.
Here is an appraisal contingency example:
The sale of 55 Main Street Hopkinton, Massachusetts, is subject to the property appraising for the purchase price or higher. If the appraisal comes in lower than the purchase price, the buyer shall have the right to terminate this agreement.
The House Sale Contingency
If the buyer has a home that they need to sell to have the finances available to purchase, there can be problems. If there is some delay, or they simply can’t find a buyer for their home, it can greatly inconvenience the other seller.
This house sale clause allows the buyer to walk away from their purchase agreement if they cannot sell their home in the time they expect. Home sale contingency clauses are one of the least acceptable real estate contingencies.
A home sale contingency creates tremendous risk for a seller. You are essentially putting faith in a buyer that they will do everything necessary to sell their property. The problem is you have no idea if they will price their home correctly, hire an excellent real estate agent, and market it well.
Of all the real estate contingencies, as a seller, this one is usually the one you’ll want to avoid.
Right of First Refusal Real Estate Contingency
A right of first refusal clause gives a buyer the opportunity the right but not the obligation to enter into a real estate transaction before others can. Usually, a right of first refusal will be found in purchase contracts involving homes. There are other examples of the first right of refusal, such as a condominium association being able to purchase a unit before it was listed for sale.
If the holder of the right of first refusal does not wish to proceed, other buyers can then move forward with a purchase contract.
The Kick-Out Contingency
A kick-out clause will give a seller the right to continue marketing a home if they receive an offer with contingencies or conditions that need to be met.
While most of the clauses we’ve looked at here protect the buyer, this one is definitely for the seller. If the seller has a buyer holding things up because they cannot sell their home, this clause can come into effect.
The kick-out clause will give the buyer protection if they are struggling to find a buyer for the property they already own, but this can delay their purchase. A kick-out clause allows the seller to continue to market their property and switch to another buyer should they be qualified to complete the sale.
The kick-out contingency clause can end the frustration the seller is suffering by switching to a buyer that can move to close a lot sooner. It is real estate terminology not many people are familiar with.
The Title Contingency
A title search will ensure that the seller legally owns the property and that any liens on the property have been resolved before the sale. Doing so will be done via a lien search. A title company or attorney will check the records to ensure everything is in order, allowing the sale to proceed.
There can be problems, however. While the issues uncovered in the title search can normally be fixed before closing, it isn’t always the case.
If the seller hasn’t proven they really own the property, the dispute over ownership can be very difficult for the buyer. If there is a lien still on the home that needs to be paid, it may be better for the buyer to break away from the deal and start looking for another property. The title contingency clause gives the buyer this option.
Most attorneys and rightfully so will recommend a buyer purchase title insurance. It is almost always money worth spending.
Video: What to Know About Title Insurance
See why having title insurance is this quick and easy to understand video.
The Home Insurance Contingency
The home insurance clause can sometimes be a requirement the lender wants to see the purchaser has taken care of before releasing the funds. While this might appear to be an easy thing for the purchaser to complete, there can be difficulties.
It can be more challenging to obtain the insurance needed for a home in certain regions that are more susceptible to natural disasters. And without insurance, the lender won’t approve the mortgage, so this clause gives the buyer the ability to walk away with their earnest deposit returned.
The Right to Assign Real Estate Contingency
This clause is more unusual as it is only relevant to wholesale investors. Wholesale investors agree to purchase properties, then sell them on to other investors at wholesale prices. This is either done by closing simultaneously or assigning the purchase agreement to the new investor.
The right to assign clause protects the wholesale investor if they cannot pass on the purchase agreement to the new investor, for whatever reason. The other investor might have problems with their financing, leaving the wholesaler with a property contract in their hands that they don’t want to purchase.
Miscellaneous Real Estate Contingencies
The following are additional contingencies in real estate that are possible to find in a contract. Use this real estate contingencies list to craft your next offer.
- Radon contingency
- Pest or rodent contingency
- Mold contingency
- Asbestos contingency
- Lead paint contingency
- Septic system inspection contingency
- Well water inspection contingency
- Wetlands contingency
- Land survey contingency
Here is another real estate contingency clause example using radon as a reference:
At their own expense, the buyer may have the property inspected for the presence of radon gas by X date. In the event the radon test indicates the presence of radon gas above the required levels by the Federal Environmental Protection Agency, the buyer shall have the right to revoke the offer under the terms of this contract to the seller or their broker by X date. The test results shall accompany such notice.There are many real estate contingencies buyers and sellers should have a firm grasp of before executing a contract.Click To Tweet
What Does No Contingencies Mean in Real Estate?
When a real estate agent hears, there are no contingencies; this is music to their ears. It simply means a buyer has not added any contingencies to the contract. This is such a big deal because the likelihood of the transaction closing increases dramatically.
A cash sale with no home inspections holds significant weight to a seller in most sales. Quite often, when there is a bidding war on a home eliminating these contingencies could be the difference in being the winning bidder even if another buyer has offered more money.
If you want to increase your chances of landing a home, you really want to remove as many contingencies as possible.
What are the Most Commonly Used Contingencies in Real Estate?
As a buyer, the financing and inspection contingencies are going to be most important. These are the typical contingencies you will find in 95 percent of all real estate transactions.
The financing contingency makes sure that you are protected should your mortgage application not proceed as you anticipate.
The inspection contingency makes sure you don’t commit to purchasing the property without finding out what the home inspector has to say. This should prevent you from buying a house that you later discover has serious and expensive faults.
If the home inspector’s report uncovers that it needs more repairs than you are happy with, or you aren’t able to secure funding, these contingencies allow you to walk away from the deal with your earnest money deposit returned.
When The Sale is Pending, Can Contingencies Allow You to Make an Offer?
It is normally still possible to make an offer if the home is listed as pending. However, the chances that it will be successful are low. When someone asks what does contingent mean in real estate, it refers to the status in the multiple listing service (MLS). When a contract has been accepted between buyer and seller, a real estate agent can make choices.
The agent can choose to mark the property as contingent or mark it as pending. In both circumstances, a contract has been accepted. You can read about the differences between the two statues in the reference above.
There could be an opportunity if the sale falls through but don’t bank on that happening. If the sales contract includes a kick-out contingency, where the seller has the option to choose another buyer if they are in a better position to purchase, you stand a better chance.
Sometimes a buyer will choose to put in what’s referred to as a backup offer in hopes the transaction falls through.
Things to Look Out For in Real Estate Contingency Contracts
The many moving parts involved with a home-buying transaction are pervasive for problems to arise. Real estate contingencies offer you a safeguard to legally exit the contract with your deposit intact.
There are some risks involved with including more contingencies in the contract, however. Contingencies tend to be less useful to sellers than buyers, which can mean that a deal with many contingencies is less likely to be agreed to by the seller. This is more likely to happen in a hot market where the seller can easily find another buyer.
To ensure that you don’t overplay your hand with more contingencies, understanding how the local market is currently performing will help. Your real estate agent should be able to advise you on the current local situation.
A few contingencies will be expected even in a seller’s market and shouldn’t put the owner off accepting your offer. The home inspection and financing contingencies are likely to be present in most real estate contracts, so you shouldn’t have to worry if you are just sticking to those.
If you are looking to buy the property as an investment, you should be able to afford to take the time to give yourself a full understanding of the local market before going further.
It would be best to look for things like how many homes are on the market and how quickly they are being sold. This should give you the information you need to decide what contingencies you can include to be acceptable to the seller.
Final Thoughts on Real Estate Contingencies
You now should have a pretty good handle on what are contingencies in real estate. Real estate contingencies can offer buyers a lot of protection in the home buying transaction. It can be very tempting to include as many contingencies as you think could be needed, but it isn’t always the best choice.
Having a better understanding of the most common contingencies and what they mean during the buying process should provide you with a better understanding of what to include and what to leave out.
Putting too many clauses in your contract can slow down the purchase, though, with help from an experienced real estate agent, you should be able to find the right approach. It should leave you with a contract that you are happy with and a seller that isn’t looking for other buyers to come along.
Hopefully, you now have a better understanding of the typical contingency clauses in real estate sales. If you have questions about a particular real estate contingency, let me know. I would be happy to assist.
About the author: The above Real Estate information about real estate contingencies buyers and sellers should know was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at [email protected] or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for the last 34+ years.
Are you thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.