Contingencies are important clauses commonly included in real estate purchase agreements. They outline conditions that must be met in order for the contract to be valid and binding. Contingencies provide protection and an “out” for buyers and sellers should certain circumstances not go as planned during the transaction process.
Understanding the key contingencies, their implications, and how to use them strategically is essential for both home buyers and investors looking to maximize protection in a real estate deal.
What is a Real Estate Contingency?
A real estate contingency refers to a clause or provision within a purchase contract that outlines a condition or action required for the agreement to become legally binding.
The contract is considered “contingent” on that requirement being satisfied within a specified timeframe. If the contingency is not met, one or both parties typically have the right to void the contract without penalty.
Common real estate contingencies include:
- Home inspection contingency – Allows buyer to inspect condition of home before closing
- Mortgage contingency – Gives the buyer time to secure financing
- Appraisal contingency – Ensures property appraises at or above purchase price
- Sale of buyer’s current home – Lets the buyer back out if their home doesn’t sell in time
Contingencies provide protection and flexibility to alter or exit deals. They can cover almost any part of the purchase process, from inspections to financing and more.
READ ALSO: How to Use Comparative Market Analysis in Real Estate
Contingencies vs. Contingent Listings
The terms “contingency” and “contingent listing” are sometimes used interchangeably, but they have distinct meanings:
- Contingency – A clause within a purchase contract outlining a condition that must be met.
- Contingent listing – A property that is under contract but not yet sold because contingencies haven’t cleared.
For example, a home could be listed as “contingent” or “pending contingent.” This signals an accepted offer with contingencies that still need to be resolved before the sale is finalized. The listing will remain contingent until contingencies are removed.
Most Common Real Estate Contingencies
While contingencies can cover almost any aspect of the transaction, certain ones are standard inclusions in most real estate purchase contracts.
Home Inspection Contingency
This gives the buyer the right to have the home professionally inspected within a specified timeframe, usually 5-15 days. If issues are found, the buyer can:
- Cancel the contract
- Request repairs
- Ask for a price reduction
Home inspection contingencies provide valuable protection for buyers against hidden defects and expensive repairs. Sellers also benefit from the chance to address problems upfront before the buyer walks away.
Mortgage Financing Contingency
Also called a mortgage contingency clause, this gives the buyer time, usually 30-60 days, to secure financing for the purchase. If financing falls through, the buyer can cancel without penalty.
This is critical protection for buyers relying on a mortgage, especially first-timers or those with complex financial situations that lenders may scrutinize. Veterans using a VA loan in particular would want this contingency.
Appraisal Contingency
An appraisal contingency stipulates the property must appraise at or above the purchase price. If it doesn’t, the buyer may be able to renegotiate or walk away.
This ensures the property’s fair market value aligns with the sales price. Since most mortgages are based on appraised value, low appraisals can derail financing.
Sale of Buyer’s Current Home
Also called a home sale contingency, this gives the buyer time to sell their existing property, usually 30-60 days. If their home doesn’t sell in time, the buyer can exit the deal for the new home.
This contingency prevents buyers from owning two homes simultaneously if their current home takes longer than expected to sell.
Other Possible Real Estate Contingencies
Beyond the most common ones above, other contingencies may be applicable depending on the property, market, or circumstances.
Title Contingency
This contingency makes the contract contingent on the buyer securing a clear title without defects. Title issues like unknown liens or ownership disputes must be resolved.
Kick-Out Clause
If the contract has a home sale contingency, sellers may add a kick-out clause. This allows them to keep marketing the home. If another buyer makes an offer, the seller can give the current buyer notice to remove contingencies or terminate the contract.
HOA Approval
For properties in homeowner’s associations, buyers may add a contingency requiring HOA approval of the purchase. This ensures buyers won’t be denied entry after closing.
Homeowners Insurance
Lenders often require proof that homeowners insurance is secured before closing. This contingency stipulates that the buyer must obtain adequate coverage.
Lead Paint or Mold Inspection
For older homes, buyers may add contingencies around lead paint or mold inspections to understand the risks before purchasing.
Septic or Well Inspection
For rural properties, contingencies may be added, requiring inspections of septic systems or wells. This identifies any issues that must be repaired.
Contingency Timeframes
Real estate contingencies specify a finite timeframe or deadline, known as the contingency period, for the condition to be satisfied. Typical durations include:
- Home inspection contingency – 5-15 days
- Mortgage contingency – 30-60 days
- Appraisal contingency – 14-30 days
- Sale of home contingency – 30-60 days
If the deadline passes without resolution, the associated contingency is usually deemed unsatisfying. This allows one or both parties to void the contract according to the contingency terms without penalty.
However, parties can mutually agree to extend contingency deadlines if needed by signing an addendum. An extension may be required if there are delays in obtaining financing, scheduling inspections, or finalizing the sale of a home.
READ ALSO: How to Start Investing in Commercial Real Estate: A Beginner’s Guide
Contingency Waiver
In very competitive housing markets, buyers may choose to waive certain contingencies to strengthen their offer.
For example, waiving the financing contingency shows sellers that the buyer is qualified and committed to purchasing the home even if lending falls through. Waiving inspection contingencies indicates the buyer will purchase the home “as-is.”
While waiving contingencies can help win bids, it also exposes buyers to significant risks if problems arise, so it should be done carefully.
Contingencies in Real Estate Purchase Offers
When preparing an offer on a home, contingencies are included as clauses within the purchase contract itself or as an addendum. The language should clearly spell out:
- The nature of the contingency
- Actions required by each party
- The deadline for meeting contingency terms
- Rights of both parties if contingency is not met
A real estate agent or attorney can help craft contingency clauses that fully protect the buyer’s interests.
If the seller accepts the contingency terms along with the purchase price and other offer details, the property goes “under contract” pending resolution of contingencies by the stipulated deadlines.
Contingency Removal
Once contingency conditions are satisfied, the buyer will submit written notice to the seller that contingencies are officially removed or waived. This is contingency removal.
For example, if the buyer’s mortgage is approved on day 20 of a 30-day mortgage contingency period, the buyer can issue notice that the financing contingency is removed.
Removal or waiver of all contingencies in the contract makes the agreement fully binding. The property sale should proceed to close once contingencies are removed, barring any new issues.
Home Inspection Contingencies
As one of the most important contingencies for home buyers, let’s look at some key details on crafting home inspection contingencies:
Scope of Inspection
Define what systems and areas of the home will be inspected. Typical inspections cover:
- Roof, attic, and exterior
- Foundation, basement
- Electrical, plumbing, HVAC
- Walls, ceilings, and floors
- Kitchen appliances and fixtures
- Pools, outbuildings
Timeline to Complete Inspection
Specify how many days the buyer has to complete the inspection, such as 10 or 15 days. Weekends and holidays may impact scheduling.
Options if Problems Found
If issues arise, outline the buyer’s options, like requesting repairs, a price reduction, or terminating the contract.
Notifying Seller of Results
Require the buyer to provide the seller with a copy of the inspection report within a certain number of days.
Professional Inspector
Stipulate inspectors must be licensed and insured for liability purposes.
Pro tip: Don’t make inspection contingencies overly broad or restrictive. Work with your agent to craft terms favorable to your needs as a buyer while still getting seller acceptance.
Mortgage and Financing Contingencies
Mortgage and financing contingencies are also essential for buyers using loans. Here are some tips on structuring them effectively:
Loan Amount and Type
Specify the loan amount needed, such as 80% of the purchase price, and the loan type – (conventional, FHA, VA, USDA, etc.).
Interest Rate Cap
Some buyers may specify a maximum interest rate, like “not to exceed 5%.” This protects against rates spiking before closing.
Loan Approval Timeframe
Indicate how many days the buyer has to secure financing, typically 30-60 days depending on the loan type.
Buyer Actions
Require the buyer to act diligently to apply for financing and provide the documents needed. This prevents buyer delays.
Back-Out Provision
If the financing terms cannot be satisfied by the deadline, the buyer may terminate the agreement without incurring any fees.
Pro tip: Only make the contract contingent on financing you’re highly confident you can obtain, and be ready to move swiftly through the mortgage process.
Appraisal Contingencies
Appraisal contingencies can help buyers avoid overpaying. Here are some tips for these clauses:
Appraisal Due Date
Specify by what date the appraisal must be completed, usually within 2-3 weeks of contract acceptance.
Minimum Appraised Value
Indicate that the property must appraise at no less than the purchase price (or sometimes a slightly lower threshold, like 97% of the purchase price).
Buyer Options
If the appraised value is lower, indicate options like renegotiating the price or cancelling the contract.
Providing Appraisal Results
Require the lender to share a copy of the appraisal with both the buyer and seller once it is completed.
Pro tip: Get pre-approved for a loan amount higher than your offer amount in case the appraisal comes in low. This maximizes your options to renegotiate.
To Recap
Contingencies are a critical element of real estate purchase contracts. They provide buyers and sellers with flexibility if certain conditions are not met during the transaction process.
The most common contingencies protect buyers in cases like home inspections revealing undisclosed problems, difficulty securing financing, or low appraisals. However, almost any part of the purchase can be made contingent on specific requirements.
As a buyer, understand how to strategically utilize contingencies to maximize protection for your investment while still keeping offers attractive to sellers. Work closely with your real estate agent to craft contingency clauses tailored to your unique needs and property specifics.
With the right contingencies in place, you gain peace of mind knowing you have options to alter or cancel the deal if concerning issues arise. This prevents you from being trapped in a binding contract on a property that no longer aligns with your goals and financial situation.
Frequently Asked Questions (FAQ) About Real Estate Contingencies
What are the most common contingencies in a real estate purchase contract?
The most common contingencies buyers include are:
- Home inspection contingency
- Mortgage and financing contingency
- Appraisal contingency
- Sale of buyer’s current home contingency
These provide protection around the property condition, financing, value, and timing of the buyer selling their existing home.
Can contingencies be removed from a real estate contract?
Yes, contingencies can be removed once their specified conditions are satisfied. For example, once a buyer has accepted a home inspection report, they can issue written notice to the seller that the inspection contingency has been removed. Removal makes the contract binding.
Who typically writes contingency clauses in real estate offers?
Real estate agents usually write the initial contingency clauses or work with attorneys to craft them. Agents rely on standardized contracts containing common contingencies. They can then customize the language at their client’s request to meet specific needs.
What happens if a buyer contingency is not satisfied by the deadline?
If a buyer contingency deadline passes without the terms being met, the buyer typically has the right to cancel the contract without penalty. For example, if financing approval is not obtained in time, the buyer can walk away and get their earnest money deposit refunded.
Can contingencies lead sellers to reject an offer?
Yes, excessive or unreasonable contingencies may cause sellers to reject offers if they have competing bids without contingencies. In very hot markets, buyers sometimes waive contingencies to increase the chances that their offer is accepted.
In another related article, Investing in Multi-Family Properties: A Lucrative Real Estate Strategy
