Common Contingency Clauses in Purchase Contracts

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If you’ve ever been a buyer or seller in the real estate market, chances are great that you’ve encountered contingency clauses in the home purchase contract. Contingency clauses state that if certain provisions aren’t met, you are legally able to back out of a contract. Today, I want to discuss the most commonly found contingency clauses in home purchase agreements.

A contingency clause defines a condition or action that must be met for a real estate contract to become binding.

A contingency becomes part of a binding sales contract when both parties, the buyer and the seller, agree to the terms and sign the contract. Accordingly, it is important to understand what you’re getting into if a contingency clause is included in your real estate contract.

Appraisal Contingency

An appraisal contingency protects the buyer and is used to ensure a property is valued at a minimum, specified amount. If the property does not appraise for at least the specified amount, the contract can be terminated, and in many cases, the earnest money is refunded to the buyer.

An appraisal contingency may include terms that permit the buyer to proceed with the purchase even if the appraisal is below the specified amount, typically within a certain number of days after the buyer receives the notice of appraisal value. The seller might have the opportunity to lower the price to the appraisal amount. The contingency specifies a release date on or before which the buyer must notify the seller of any issues with the appraisal. Otherwise, the contingency will be deemed satisfied, and the buyer will not be able to back out of the transaction.

Remember: A contingency clause in a real estate deal gives the parties the right to back out of their contract under specified circumstances that are negotiated between the buyer and seller.

Third-Party Financing Contingency

A financing contingency gives the buyer time to apply for and obtain financing for the purchase of the property. This provides critical protection for the buyer, who can back out of the contract and reclaim their earnest money in the event they are unable to secure financing from a bank, mortgage broker, or another type of lending.

A financial contingency will state a specified number of days the buyer is given to obtain financing. The buyer has until this date to terminate the contract (or request an extension that must be agreed to in writing by the seller). Otherwise, the buyer automatically waives the contingency and becomes obligated to purchase the property, even if a loan is not secured. As you can imagine, this contingency is usually the linchpin of all real estate transactions.

Home Inspection Contingency

An inspection contingency gives the buyer the right to have the home inspected within a specified time period, such as five to ten days. It protects the buyer, who can cancel the contract or negotiate repairs based on the findings of a professional home inspector. An inspector examines the property’s interior and exterior, including the condition of electrical, plumbing, structural, and ventilation elements. The inspector provides a report to the buyer detailing any issues discovered during the inspection. Depending on the exact terms of the inspection contingency, the buyer can:

  • Approve the report, and the deal moves forward
  • Disapprove the report, back out of the deal, and have the earnest money returned
  • Request time for further inspections if something needs a second look
  • Request repairs or a concession (if the seller agrees, the deal moves forward; if the seller refuses, the buyer can back out of the deal and have their earnest money returned)

Existing Home Sale Contingency

Although in most cases it is easier to sell before buying another property, the timing and financing don’t always work out that way. An existing home sale contingency gives the buyer a specified amount of time to sell and settle their existing home in order to finance the new one. This type of contingency protects buyers because, if an existing home doesn’t sell for at least the asking price, the buyer can back out of the contract without legal consequences.

House sale contingencies can be difficult on the seller, who may be forced to pass up another offer while waiting for the outcome of the contingency. The seller retains the right to cancel the contract if the buyer’s home is not sold within the specified number of days.

A real estate contract is a legally enforceable agreement that defines the roles and obligations of each party in a real estate transaction. Contingency clauses attach and are made part of the contract. It is imperative to read and understand your contract, paying attention to all specified dates and deadlines. Time is of the essence in real estate and even one missed deadline can have negative and costly repercussions for both the buyer and seller in a transaction.

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