In many real estate transactions, the term 'contingency' may
come up. A contingency is a clause that is added to the contract that gives the
parties the right to back out of the contract under certain circumstances that
must be negotiated between the buyer and seller. Essentially, a contingency
clause allows either the buyer or the seller to back out of the sale without
any kind of repercussions or breach of contract. For the majority of real
estate transactions, most contingencies are for the benefit of the buyer. It's
important to know the most common contingencies that could come up in your next
home sale or purchase.
Appraisal Contingency
For those home purchases that require funding, an appraisal
is required to determine the overall value of the home. The lender won't lend
more than what a home appraises at, so should an appraisal come in lower than
asking price, a problem arises. If a buyer doesn't have the cash to make up the
difference, the lender won't loan more money to cover the difference. Because
of this, an appraisal contingency is helpful: it allows the buyers to back out
of a deal if the appraisal price is not as high as the purchase price, or it
allows the buyer and seller to re-negotiate the purchase price, giving the
buyer the ability to back out of the deal if the seller declines to come down
in the total price of the property.
Financing Contingency
The buyer is responsible for funding the home purchase,
whether it be with cash, mortgage loan or some kind of other funding. If the
purchase is dependent on financing a loan, then a financing contingency will
likely be included in the contract. A financing contingency helps protect the
buyer should the loan not come through. A financing contingency can also
include other details regarding the purchase, like the type of loan, the amount
of the down payment, loan term and even the interest rate. This is an important
contingency in that it protects the buyer, allowing him/her to walk away from
the deal without any repercussions or loss of earnest deposit, which is
incredibly valuable to the buyer.
Home Inspection Contingency
One of the most important protection contingencies, the home
inspection is a huge part of the home buying process. The inspection is
performed by the buyer in order to ensure the property is up to his/her
standards. A home inspection does a great job at determining the overall
condition of the property, calling to light any major issues with the home's
major systems. The buyer has a lot of protection with a home inspection
contingency, especially if major items come up in the inspection report. With a
home inspection contingency, the buyer can: ask for a discount to help with any
necessary repairs, go through with the sale regardless of the findings and do
the repairs after move in, or back out of the deal based on the findings
without any negative repercussions.
Home Insurance Contingency
Home insurance is important: it provides protection for
things such as property damage, fires, natural disasters, and other issues.
When it comes to a home insurance contingency, this could be a requirement that
the buyer secures home insurance prior to finalizing the purchase. The
contingency could be part of the loan agreement, put in place by the mortgage
lender, or it could be something the seller dictates in the contract. This can
be a tricky one (especially if the insurance is needed prior to closing) if the
property is located in an area where insurance is difficult to get, like a
known flood zone or other region that experiences inclement weather and/or
natural disasters.
Home Sale Contingency
For those buyers who are also selling their own home, a home
sale contingency is usually inserted into the contract. Basically, this
contingency is "I want to buy your house, but I can't until my house
sells." Properties listed as "under contract" or
"contingent offer" likely have a home sale contingency on them. The
homes are still open for offers, but the contingency clause will likely have a
stated amount of time for the original offer maker to sell his/her home before
the seller can accept new offers.
Contingencies are common in real estate, and they're not a
bad thing: they help protect both buyers and sellers. If you have questions
about contingencies, or about real estate in general, contact your local agent
for more information!
I am a realtor working in South Florida. If you need help buying or selling a home, please contact me. Also, please view my website where you will also be able to search the MLS.
