4 Common Real Estate Contingencies

A contingency to a real estate contract is a provision added that specifies certain terms that must be met in order for the sale to proceed. Here are 4 of the most common that are found in today's residential real estate transactions. 

1. Financing Contingencies:

Most real estate purchase agreements include a financing contingency. It allows buyers to withdraw from the purchase agreement without penalty if they're unable to obtain a mortgage or close a loan. Most purchase agreements state that the buyer has a specific time frame in which to secure a loan. The contingency usually also lists out the details about the financing, such as what type of loan it is, the amount of the down payment, the loan term and what the interest rate is. 

In some circumstances, buyers opt to omit the financing contingency, which can mean they are willing to take substantial financial risk if they're unable to obtain financing. This would typically only happen in a hot market when a buyer wants to show their confidence and to be more appealing to a seller considering multiple offers. In this case, the buyer would typically be, at the very least, forfeiting any earnest money they put down on the sale if the financing fails to come through.

What it Means to Sellers:

Since this is a common contingency that is found in most loans, there's no reason to be concerned about it. Your real estate agent should contact the buyer's lender to ensure the buyer does in fact qualify for the loan they describe in the contigency. 

2. Appraisal Contingencies:

An appraisal contingency is included in most real estate offers when the buyer is relying on bank financing to purchase the home. The lender will require that an appraisal is performed to ensure that the property is valued at or below the requested loan amount. If the home doesn’t appraise high enough, the lender may refuse to finance the purchase. 

What it Means to Sellers:

The only issue that could arise is if your appraisal comes in low and it's going to cause the buyer's loan to be denied. If that happens and you feel like there was an error made, you have the right to request a second appraisal from another party. Alternatively, you can re-negotiate pricing with the buyer to settle on a price that values the property at or below the loan amount. If you choose not to take either of these steps, the buyer has the right to cancel the contract.

3. Home Inspection Contingencies:

This clause is intended to protect the buyer against damage that may affect the value of the home. It allows the buyer a certain time frame to inspect the home and withdraw from the agreement if she isn’t satisfied with its condition. During this time, the buyer may bring in any number of inspectors, contractors, exterminators, electricians and plumbers to inspect the property. 

What it Means to Sellers:

If the inspection reveals defects, more negotiations often take place to determine how repairs will be paid for and who will be responsible for ensuring they are completed.

4. Home Sale Contingencies:

A buyer may include a home sale contingency if they're depending on the sale of her existing home to purchase yours. There are two different situations that can occur with this contingency.

  • The buyer puts in an offer on your home but hasn't received an offer on their home yet. 
    In this case, your home will be listed on the MLS as "under contract" - meaning it's already got an accepted offer on it pending the home sale contingency is met. You can continue to market your home and accept offers, but many are likely to be turned off by the "under contract" status. If you get another offer that you'd like to accept, your original buyer will have a set amount of time, defined in the contract, to meet their contingency and move forward with the sale. If they fail to do so, you'll be able to move forward with your new buyer.
  • The buyer already has an offer in on their home and it's under contract. 
    In this case, you would stop marketing your home and wait for the buyer's home to close. If their home fails to close in the period of time allotted in the contract, the contingency is not met and you can once again market your home and accept other offers. 

    What it Means to Sellers:

    Home sale contingencies are tricky, and need to be taken on a case by case basis. As a seller, you are relying on 2 buyers (your buyer and your buyer's buyer) to be able to close 2 different deals. If anything goes wrong in the first sale, there is a good chance your home won't close. But keep in mind, most buyers are also sellers, and few people can afford to buy a second home without selling their first, making home sale contingencies fairly common.

A real estate purchase agreement is a legal contract. If you’re unsure about the legal ramifications of certain contingencies, please seek legal advice before signing any real estate contract.  Barker Group would be happy to provide you with several recommendations for real estate attorneys that we frequently work with.