For 99% of the population, buying a home is the largest and most important purchase they will make in their lifetimes. The property will cost you a lot of money so you want everything to go as smooth as can be when buying a home. As a real estate investor, you may want to add contingencies to your home offer contracts so that you have a way out of the deal if needed.
When the seller accepts your offer on a house, you will enter into a sales contract in order to complete the purchase. The contract will include things like the sale price, the amount of the earnest money deposit, and the length of escrow. Since most real estate transactions involve contingencies, you'll want to learn about the contingencies that protect yourself as a buyer.
If you are looking to buy a home, you should ask yourself questions like: What Are Contingencies? What Are Some Common Contingencies? What If I Don’t Include Contingencies In a Contract?
In this article, you will learn exactly what contingencies are in real estate and all the deal-making details you need to know about contract contingencies.
So, let's jump right into it. We hope you enjoy What Are Contingencies In Real Estate? The Ultimate Guide! Use this menu to jump to your preferred section of choice:
Contingencies are conditions in a real estate contract which can make or break a real estate sale. When used the right way, a contingency relieves a party from their obligation to move forward with the contract without putting that party in breach of the contract.
Contingencies in real estate exist because not all information about a transaction is readily available when a buyer and a seller come to a contractual agreement regarding the sale of a property. Also, certain events might need to occur prior to a party becoming fully committed to a deal, such as the sale of a buyer's current home.
Buyers are generally the parties who benefit the most from contingencies in real estate, though either party may benefit from them. It all comes down to the negotiations between the two parties. If both sides have agreed to contingencies, all of the conditions must be met so the transaction can continue to move forward.
The contract becomes binding after all of the contingencies have been removed. Then, the sale can be completed. If any conditions on a contingency cannot be satisfied, both parties will have to agree to renegotiate the contract. Otherwise, they may walk away from the real estate transaction without any repercussions. This means the buyer can look for another house and the seller can list the house back on the market.
Real estate contract contingencies work more to the benefit of buyers because they provide them with an option to walk away from the deal. For this reason, home sellers might see contingencies in a real estate offer as a liability.
A contingency clause is a condition which must be met for a real estate contract to become binding. A variety of contingency clauses may be incorporated into a real estate sales contract that will impact the outcome of the sale. When a contingency clause is included in your real estate contract, you should understand what you are getting into.
A contingency clause can also be known as an escape clause for one or both parties. If one party is unable to satisfy the contingency conditions, the other party may be released from its obligations in the real estate contract.
Here's an example of a title contingency clause concerning the transfer of clear title to a property:
Additionally, when the buyer cannot get a loan to purchase the home within a specified amount of time, a mortgage contingency clause states that the buyer has a choice to walk away from the deal without any penalties.
Home buyers often include a home inspection contingency clause in their offer which states they will buy the house only if they get the home inspected and approve of the results. The buyer might find out about issues with the condition of the property when the inspection report comes in. Unsatisfactory problems can include things like termites, mold, or issues related to the structural integrity.
The seller might agree to pay for necessary expenses to resolve the issues. If that is not the case, the buyer can cancel the real estate transaction or ask the seller to lower the sales price.
Contract contingencies allow buyers to cancel a real estate contract without any penalties and get their earnest money deposits back. There are multiple steps when buying a house, and many of those steps happen after an offer has been accepted.
Contingencies are included in the sales contract to ensure that the parties have enough time to meet certain conditions of the contract and gather important information regarding the sale. Home buyers should consult with licensed real estate agents and real estate attorneys to understand how contingencies are interpreted in each specific contact.
Contract contingencies strongly affect the closing of a transaction. The best written contingencies are specific and include answers to the following questions:
Here's a short video explaining what contract contingencies are and how they work:
A contingent offer is when a buyer makes an offer on a house that is not binding until certain conditions have been met. Essentially, if any contingencies are present in a buyer's offer on a house it is considered a contingent offer.
Nearly all offers that real estate agents write up are contingent offers. A contingency is placed in an offer by the party who receives its benefit. We'll cover the most common contract contingencies later in this article.
To give one example, when a homeowner is moving from one house to another, it is common to write up an offer contingent on the sale of their existing house. The buyer is only locked in to the contract if their current home is sold. This protects the buyer from getting locked into a real estate transaction that they are unable to afford.
Sellers always prefer offers without any contingencies that benefit the buyer. Since nearly all buyers are prudent enough to make contingent offers, sellers should be motivated help the buyer remove contingencies as soon as possible to make sure they're committed to the deal.
A seller accepting a contingent offer should be aware of the amount of time it could take for their buyer to remove contingencies. Since they cannot accept other offers while under contract with a contingent offer, they should feel confident with the buyer and ask for an earnest money deposit.
For more, check out this video expanding on What Is A Contingent Offer?:
Common contingencies reduce risks for home buyers, therefore most real estate transactions include them to act as protection for the buyer. Here are some common contingencies that you definitely want to consider including in your sales contract:
A mortgage contingency, also called a loan contingency, is a clause that allows the sale of a home to proceed only once certain conditions are met regarding the buyer's ability to get a loan. This contingency clause will set the timeframe for the buyer to acquire a mortgage and describe what happens if the homebuyer cannot meet the terms.
If the buyer fails to secure a mortgage loan, the contract may be voided. Homebuyers are encouraged to sign the purchase agreement after they get a pre approval for a mortgage. A mortgage contingency clause states there will be no penalties for the buyer or the seller if they choose to back out of the purchase agreement before the buyer secures a mortgage.
The buyer can get their earnest money deposit returned, and he or she will not be obligated to purchase the home. However, the buyers will lose their earnest money deposit if they back out of the deal after securing the desired home loan. The mortgage contingency often includes lending terms which specify the interest rate and the specific dollar amount of the loan to be obtained.
Both parties will agree upon a specific amount of time the buyer has to secure the mortgage approval. The typical time period for a mortgage contingency is around 21 to 30 days. If the buyer cannot get a home loan within the timeframe, the seller has the right to cancel the contract and look for another buyer.
An appraisal contingency protects the buyer if the sale price doesn’t fall in line with the fair market value. An appraisal will determine the fair market value of the home. Furthermore, you're required to receive a satisfactory appraisal by the mortgage company to acquire a loan. The mortgage company is only able to loan you up to the fair market value of the home.
For example, you agree to buy the house for $250,000 but the appraisal determines that the value of the house is $220,000. The mortgage company is only allowed to give you the loan up to the fair market value of the house. The bank or the private money lender doesn’t want to loan out an amount that is more than what the home is worth.
You'd be responsible to make up for the $30,000 difference between the sale price and the appraised fair market value. You can choose to renegotiate the sale price with the seller or look for additional financing. If both of these options don’t work out for you, the appraisal contingency allows you to walk away from the deal.
A financing contingency allows the buyer to go out and acquire a home loan within a specific timeframe. This contingency protects the buyer because they can walk away from the deal and get their earnest money back if they cannot secure a home loan.
The financing contingency will give the buyer a specified amount of time to get the loan. The buyer may cancel the contract anytime before this date if financing cannot be obtained. Additionally, the buyer can request an extension of time from the seller, which would need to be in writing. If the buyer doesn’t terminate the sales contract by the specified date in the contingency, they may be obligated to buy the house with or without a home loan.
A home sale contingency protects the buyer because the transaction will depend upon the sale of the buyer’s home. The sales contract will move forward if the buyer sells their house by the specified date. The sales contract will be terminated if the buyer cannot sell their house by the specified date, and the buyer will get their earnest money deposit back when the deal is cancelled.
Most buyers have to sell their current home to purchase a new one. When buying a more expensive house, many buyers will need to sell their existing home to have enough funds available and to improve their debt to income ratio. A home sale contingency will give the buyer a specified amount of time to sell and settle before buying a new home.
Under this contingency, buyers can avoid having two houses and two mortgages at the same time. The buyer can sell their current home and commit to a new home after that. A home sale contingency allows the buyer to walk away from the deal if they are unable to sell their existing home.
However, this contingency does not prevent the buyer from other costs of home buying such as appraisal fees, inspection fees, and bank fees. These expenses will not be refunded if the deal is cancelled under a home sale contingency.
A home sale contingency might give the seller a hard time because it could take a while and they could miss out on other offers. The seller may only choose to cancel the contract if the buyer’s home is not sold within the specified time period.
With the seller accepting a home inspection contingency clause, the buyer will have the right to get the home inspected within a specified timeframe. A home inspector will check the interior and the exterior of the property. The inspector will look at the condition of things like electrical, plumbing, structural components, and ventilation.
Additionally, the inspector will look for other issues during the home inspection such as mold and damage from wood-destroying insects. A home inspection contingency will allow the buyer to terminate the contract or negotiate repairs with the seller based on the report from a professional home inspector.
Here's a sample section of a contract that covers the inspection contingency:
A homebuyer may include an insurance contingency in the contract to make sure they can obtain homeowners insurance. There are multiple parties that can request this contingency such as the seller or the mortgage lender. In order for the buyer to secure a loan, a mortgage lender might ask the buyer to add an insurance contingency to the deal.
Homeowner's insurance can provide coverage for things like property damage, fires, and disasters. In some geographies, additional insurance is required to protect the property from issues such as hurricanes and earthquakes. If there is no insurance coverage for any of these issues, it can affect the overall condition or the future value of a home in the event of a disaster.
If the insurance contingency is not fulfilled within a specified timeframe, the real estate transaction cannot be closed. Additionally, this can delay the sales and closing process.
A kick out clause is a contingency that is often used by the seller to get more protection against a home sale contingency from the buyer. During the sales agreement process, the seller can choose to add a kick-out clause which means that the seller can continue to market the property to other buyers.
When the seller does find a buyer, he or she will give the current buyer a specified amount of time to fulfill the home sale contingency and continue to move forward with the sales contract. If the buyer fails to clear the home sale contingency within that time, the seller can terminate the contract and sell the house to the new buyer.
A home title is the record of ownership and legal document that shows all the owners of the home in the past and present. Additionally, it is a record of any liens or judgements against the real estate property. In a typical real estate transaction, a title company or attorney will review the title of the new home before closing.
If there are any issues on the title, they need to be resolved quickly so that the title can be transferred to the new owner free and clear. However, if the issues cannot be resolved before closing, the buyer has the right to back out of the deal using a title contingency. This contingency helps the buyer to avoid contesting the ownership with a third party or having to pay off someone else’s debts.
“But land is land, and it’s safer than the stocks and bonds of Wall Street swindlers.” - Eugene O’Neill
No contingencies in real estate means that the buyer agrees to buy the property without including any contingencies in the contract. When you waive contingencies, your offer might be more attractive to the seller and have a higher chance of getting accepted.
You might want to think about waiving contingencies when there are few homes for sale or when you face intense competition in the housing market. No contingencies can be very risky to buyers because there are no ways to back out of a deal without losing the earnest deposit.
How a party removes contingencies will depend on how the real estate contract is constructed.
In some states like Florida, the contract used by Florida Realtors (the "FAR/BAR") states there is no action that needs to be taken for an inspection contingency to be removed. It automatically expires once the date specified in the contract passes. This brings up the issue of silence on the part of the party claiming the benefit of the contingency.
On the West Coast where the California Association of Realtors (CAR) Residential Purchase Agreement (RPA) is often used, the buyer or seller needs to take action in order to remove contingencies. The parties need to sign a written “Removal of Contingencies" to officially terminate the contingency and make the contract binding.
Otherwise, a contingency is still in place even if the specified time period has passed. The only way for the seller to take action is by sending a “Notice to Perform" to the buyer, which says he or she needs to remove the contingency or the seller may cancel the contract.
In rare cases, a buyer may elect to remove contingencies with their initial offer. There may be a clause which allows them to do so, like the one in the image below.
When you remove your contingencies in a real estate contract, the contract becomes binding.
The buyer has to sign off on contingencies or choose to cancel the real estate transaction by the end of the contingency period. A buyer generally has the option to terminate the contract and get their earnest money deposit refunded before they remove the contingencies in writing.
Once all the contingencies are removed, the buyer is obligated to buy the house. This means the buyer has to accept the current condition of the property and commit to close escrow. The buyer’s deposit will be at risk after the contingencies removal. The buyer cannot close on the home without removing all of the contract contingencies.
For example with an appraisal contingency, there's a risk of removing the contingency before the appraisal. Specifically, you might have to pay more money out of pocket for the house if the appraised value comes up short. Additionally, if you decide not to buy the house after you remove all the types of contingencies, you might end up losing your earnest money deposit.
The most important contingency in a real estate offer contract totally depends on the buyer and their priorities.
As professional real estate investors having completed hundreds of real estate deals, we view the inspection contingency as by far the most important contingency in a real estate sale. If the buyer is unable to verify the condition of the property, he or she could be investing in a disaster property. Without time for an inspection, the house could be a terrible buy and may potentially lose money.
The buyer needs to confirm the condition of the home in order to find out things like unpermitted structures, hazardous materials, or dysfunctional systems of the house. If the buyer finds any fatal flaws or is simply unsatisfied with the results of the property inspection, he or she can decide to back out of the contract and get the earnest money deposit back.
If you include real estate contingencies at the very beginning of your negotiation, you can prevent yourself from many potential problems. Having no contingencies can increase your chance of buying home from the seller, but you can put yourself in a risky situation.
You should have a strong understanding about contingencies because this will ensure your chances of closing on a great real estate deal. We hope this Ultimate Guide has increased your Real Estate Skills, and as a result, will make you a better real estate investor.
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