Key Takeaways
- A real estate contingency is an event or condition that must be met before a purchase contract becomes binding.
- Contingencies can double as a buffer and a negotiating tool for buyers and investors.
- Find out the most commonly used types of real estate contingencies, here.
Whether you are a home buyer or investor, ensuring that a real estate investment is sound is in your best interest – that’s where real estate contingencies come in. Imagine what a nightmare it would be if you purchased a great property, only to discover a myriad of expensive repairs to be made. From the perspective of the seller, it would be unfortunate to accept a top offer from a buyer who turns out to be un-approved for a mortgage. Real estate contingencies serve to protect both buyers and sellers from these types of unfortunate scenarios. Read on to find out how a real estate contingency works, common contingency in real estate examples, and best practices.
What Is A Real Estate Contingency?
A real estate contingency is defined as an event or condition that must be met by the buyer or seller of a property, before the purchase contract becomes binding and finalized. Contingencies can serve to protect both buyers and sellers, so it is critical for buyers to understand how contingency real estate works, and what type of real estate contingency contract works best for them.
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How Does A Contingent Offer On A House Work?
When searching through property listings, you may have seen quite a few with a “contingent offer” status. This may have made you wonder, what does contingency mean in real estate, and how does it work? When a property is listed with a contingent offer status, it means that the seller has accepted an offer, but is currently waiting for certain criteria to be met before the deal can close. These criteria are outlined in a contingency real estate contract agreed upon by both the buyer and seller, and is often included as a section of the purchase agreement.
If the buyer or the seller has any trouble fulfilling any of the criteria set forth, the purchase contract can usually be broken without any penalty being assessed to either party. This helps protect the buyer in case anything about the deal or the property is found to be unsatisfactory. If this happens to be the case, the buyer can rescind their offer and still recover their deposit if they complied with the contingency terms. Conversely, the contingency also protects the seller in the case that the buyer does not meet the criteria that were agreed upon.
4 Common Real Estate Contingency Contracts
Real estate contingencies are designed to protect the buyer, as well as the seller, in case of unexpected events that occur before the purchase deal is finalized. There are many types of contingency clauses that are used, ranging from those that outline financial requirements or to those that provide certain criteria regarding the condition of the property. In essence, it is possible to create a contingency clause for just about anything, but there are several types of real estate contingency contracts that are commonly used.
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Mortgage Contingency: It is very common for purchase agreements to include a financing contingency clause. The agreement usually allows the buyer 45 to 50 days to secure a loan, and details specific requirements such as the down payment, loan type, interest rate and loan term. In this case, the contingency protects the buyer in case they are not able to obtain a loan within the specified amount of time. In most cases, the buyer will be able to withdraw their offer without a penalty.Buyers may choose to forego the mortgage contingency if the property is being sold in a competitive market. For the seller, it may help the offer stand out when there are multiple offers. However, buyers should be aware that this move can be a risk, and may have to forfeit their earnest money if they are not able to obtain a mortgage loan.
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Appraisal Contingency: Appraisal contingencies tend to come into play when a lender requires an appraisal before financing a deal. This helps the bank determine whether or not the requested loan amount is above, below, or equal to the property value.The appraisal helps protect buyers, in the case that the property was being sold for an unfair value. However, if the appraisal comes in lower or higher than the requested loan amount, the buyer will often have to re-apply for a loan, or re-negotiate the sale price with the seller.
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Inspection Contingency: Buyers are encouraged to include a home inspection contingency clause in order to protect themselves. Even if a property appears to be in good condition to the naked eye, no one can be too sure what expensive repairs might be required. Common scenarios include electrical issues, plumbing or heating issues, pest infestation, foundational damage or even health hazards such as asbestos.During the contingency period, the buyer can hire inspectors and other experts to thoroughly inspect the property. If the inspection reports reveal any repairs to be made, the buyer and seller will often negotiate who will be responsible to pay for the repairs.
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Home Sale Contingency: A home sale contingency often comes into play if a buyer is depending on the sale of their existing home or property, to allow them to purchase the current property at hand. There are two common home sale contingency scenarios: when the buyer has put in an offer, but has not received an offer on their current property yet, and when the buyer already has an offer on their current property under contract.When it comes to a home sale contingency, buyers should be cognizant of the risk the seller will be taking on, especially when the buyer has not yet received an offer on their current property. This type of scenario can bring on increased risk and a dragged out process. Because of this, some sellers may choose to refuse offers that come with a home sale contingency.
3 Rules For Using Real Estate Contingency Clauses Properly
Real estate contingencies are best used when the buyer is aware of best practices. There are great contingencies that are commonly used to protect the best interests of a buyer, so it may be tempting to include as many real estate contingency clauses as possible. However, you may want to re-think this temptation after getting to know some best practices for leveraging real estate contingencies:
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Make use of contingencies to protect yourself: As described in the sections above, the purchase agreement is a legally binding document, while contingencies are designed to protect buyers and sellers. When making an offer, be sure to consider including contingency clauses in your contract to avoid unfortunate or unfair circumstances.
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Use contingencies sparingly to make your offer more attractive: Although contingencies are great for putting into place some protection, they are unfortunately a double-edged sword. Because contingencies can sometimes elongate the timeline or cause deals to fall through, sellers are often wary of accepting offers with contingencies, especially if they have some offers without. Because of this, buyers should only include a contingency if necessary, and if so, try to limit them to just one or two.
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Do not hesitate to leverage contingencies as an opportunity for negotiation: Some contingencies can open up a channel for negotiation, rather than completely rescinding an offer. For example, if the inspection process results in some issues or repairs, buyers can use the opportunity to ask the seller to make those repairs, or even to drop their selling price.
Real estate contingencies are designed to protect home buyers and investors when purchasing a property. In summary, contingency clauses are usually included in the purchase agreement, which is legally binding. Contingencies serve to provide a buffer while the purchase undergoes a vetting process, and if any criteria are not met, the buyer can rescind their offer or ask for re-negotiation without any penalties. However, including too many contingency clauses in an offer may scare sellers away, so a best practice is to only include contingencies when absolutely necessary.
How many and what types of real estate contingencies are the most appropriate when purchasing a property? Share your experiences or questions in the comments below:
