Real Estate Contingencies: What You Need to Know

Real Estate Contingencies: What You Need to Know

Real estate contingencies stipulated in a home purchase contract

A contingency in a home purchase contract is a clause that defines a situation or action that must be carried out first for a real estate purchase agreement to be binding.

This means that despite having an accepted offer on the property, there are still steps that must be completed before the contract commits both parties.

Contingencies allow the buyer or seller to withdraw from the agreement if they are not met. For example, if the buyer has problems or other financing problems to obtain a mortgage, the contract can be broken without penalties for the parties involved.

Most real estate contracts have a period of time between the signing of the contract and the actual closing of the sale. During this period, also known as escrow, or promise to buy and sell, contingencies are expected to be met. If they are not met by the final closing date, either party may have the right to cancel the purchase and sale contract without penalty, as long as the causes that could affect the contingency have been agreed in advance.

What are some common examples of real estate contingencies?

It is common for various contingencies to be present in a real estate purchase agreement. Examples of contingencies that commonly occur in a real estate contract include:

  • Insurance approval: Often times, a buyer and / or lender will request an insurance approval contingency on the real estate purchase contract. Neither the buyer nor a lender would be willing to close a transaction if the buyer was unable to obtain homeowners insurance for some reason. Typically, the buyer will immediately apply for insurance to meet the deadlines for a refund of the bond if the home cannot be insured for any reason.
  • Financing or mortgage approval: This is one of the most common contingencies in real estate. Generally, real estate sales contracts often depend on the buyer being able to obtain financing, with which they will buy the property.
  • Deadline: Sometimes the sale of real estate depends on the closing of the sale before a specific date. The seller often uses this contingency to ensure that if the buyer cannot finance a deal by a certain date, the seller can cancel the purchase. This allows the seller to submit other offers that are waiting or the seller can choose to extend the closing date of the contract.
  • Inspection: Most real estate purchase contracts give the buyer the right to have a real estate inspector evaluate the property for potential problems, defects, or zoning violations. In foreclosure sales, the deal may depend on the buyer accepting the property “as is.”
  • Improvements: This is an agreement regarding the ability to make improvements or renovations to the property. Typically more common on commercial properties.
    Previous Property Sale: As a buyer, if you already own a home and expect to use the proceeds from its sale to help purchase a new home, you may want to insert a condition whereby the purchase of the new home is contingent upon closing of a sale of the property you own. However, a seller may not accept the buyer’s offer if it includes this contingency, especially if it has other bidders waiting.
  • Appraisal contingency: Sometimes a real estate sale depends on an appraisal to ensure that the property is worth the amount of the sale price. If the evaluation reveals a price lower than the asking price, there will probably be more negotiations to see if the seller will lower the price. Otherwise, the real estate purchase agreement may be voided.
  • Satisfactory travel contingency: this is a contingency requested by the buyer to cover if during a final tour of the property the day before closing, the property has suffered damage since the contract was entered into.
  • Other contingencies: The law allows the buyer or seller to propose almost any type of contingency in negotiating a real estate purchase agreement. However, this does not mean that the buyer or seller will accept the contingency.

Contingencies are very common and sometimes complicated, therefore, it is advisable to consult an experienced real estate attorney, for your peace of mind and that of your family.

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