What Are Contingencies in Real Estate Transactions

Author: Bill Gassett

What Does Contingency in Real Estate Mean

The definition of a contingency is an action or condition that needs to be met for a real estate contract to become legal and binding.

The real estate contingency definition is something that all buyers, sellers, and agents should be intimately familiar with.

Real Estate contingencies have become an integral part of most contracts. If you are buying or selling a home, there are real estate contingencies you should know.

Whether buying a home to live in or investing in property for a return, real estate contingencies can help you avoid a costly mistake.

Contingencies in real estate give you more control over the home-buying process with a get-out clause if things don’t go as expected.

Purchasing a property involves entering into a legally binding contract with the seller, so you must know how home-buying contingencies are applied.

With a better understanding of the real estate contingency process, you can enter home purchase negotiations with more confidence and knowledge. If you are a first-time homebuyer, it will be beneficial.

Our guide should give you the information to navigate contingencies in real estate deals successfully. Let’s take an in-depth look.

What is a Real Estate Contingency Contract?

As mentioned, a contingency in a real estate contract means that certain things must be completed for the home purchase to continue.

An action has to occur to allow the contract to become binding and the sale to head toward closing.

While the real estate contingency offers protection to buyers, it isn’t without its downsides. Contingencies can slow down the home-buying process and make it more challenging to negotiate the purchase contract.

The home seller is more likely to want to deal with buyers with fewer contingencies, as it offers less risk and speeds up the sale.

Not every home purchase is the same. In some cases, it will be better to have more contingencies than others.

What’s Found in Real Estate Purchase and Sale Contracts

Generally, contracts to purchase real estate need to include specific essential details about what is expected to happen and when. These will include:

• The names of the parties involved, i.e., the buyer and seller.
• The address of the property and description of the home.
• The real estate companies engaged in the sale, if there are any.
• The offer price that’s been agreed upon by the seller.
• The amount of the earnest money deposit.
• Who is holding the earnest money?
• What kind of escrow accountwill the deposits be held in?
• The amount of the buyer’s down payment.
• The mortgage amount the buyer is financing.
• When the buyer needs to apply for their mortgage.
• The date by which the buyer needs to have their mortgage commitment.
• Additional terms of the sale.
• The final walkthrough date.
• The anticipated closing date.
• Any Real Estate contingencies – below, we will discuss typical contingencies in a purchase and sales.

Homebuyers can add contingencies to the contract to suit their situation and requirements.

Real Estate Contingency Contract Rules

The contingency is a clause that needs to be met by either the buyer or the seller, or both to continue with the sale.

If necessary, you can negotiate with the seller over the contingencies applied to the contract. This should ensure that you are protected during the home purchase and that the seller is happy with the arrangement.

It is advantageous to understand how contingencies work to avoid confusion and think you need to push for certain contingencies that aren’t important or necessary to the situation.

Contingencies are conditional; the contingency will remain valid if the specified task is completed in the time allowed. If the conditions aren’t stuck to or met in time, the purchase contract will not continue to apply.

Set a deadline; with home sales often needing to be completed by a set time, deadlines must feature timeframes in contingencies.

What is a Real Estate Contingency Period?

There are deadlines with contingencies in Real Estate contracts. It is referred to as the real estate contingency period.

Having deadlines should ensure the process continues progressing with fewer unnecessary delays. The buyer and seller can be held accountable for delays if there are clear deadlines.

Contingencies in a real estate offer must be specific; the contingency details must accurately describe what must happen. They cannot simply be a general wish for some action.

The clause needs to state precisely what outcome has to be met so that there isn’t any doubt about whether the contingency has been completed.

For example, a mortgage contingency clause will state a time frame by which a buyer needs to procure their financing. The buyer’s lender will provide a commitment letter stating the buyer has gotten their funding.

Ensure the agreement is binding; there is less requirement to stick to the terms without a binding contract.

A binding contract will ensure the buyer and the seller know and carry out their responsibilities. There also needs to be a plan for what to do if these obligations are unmet.

The Mortgage Financing Contingency

For many, a mortgage is crucial to getting the house of their dreams. The financing contingency helps out buyers who don’t get the expected loan they need to purchase the home.

While they might have had pre-approval for a mortgage, something could have changed in their financial situation before they finally applied to the lender.

Perhaps they have taken out another small loan or missed payment without realizing this could affect their credit score and their chances of getting the funding they thought they had already been approved for.

With a lower credit score, buyers could find trouble securing the loan they need to buy the home from any lender.

The mortgage contingency clause allows them to walk away from the purchase agreement without facing the problem of breaking the contract and losing their earnest deposit.

The Appraisal Contingency

Another real estate contingency you need to know is the lender’s appraisal. Mortgage lenders don’t like the prospect of loaning more money to purchase the property than the home is worth.

They know some customers will fail to keep the mortgage payments and potentially enter foreclosure.

If they have loaned more money than the home is worth, they stand to lose out due to foreclosure. Given this, they need an appraisal of the value of the house.

A professional and licensed appraiser will find the property’s actual value.

Appraisers will visit the home, take measurements, take photographs, and assess the neighborhood. They will compare the property to other houses to accurately determine the fair market value. Many factors can influence appraised value.

The appraiser will create a report with their assessment of the market value. If the appraisal comes in lower than the buyer has agreed to pay for the home, there could be problems. It’s known as an appraisal gap.

An appraisal gap will mean the buyer must find the value difference, as the lender won’t loan the total amount. This will mean they cannot continue purchasing the home for many people.

While it is possible to dispute an appraisal valuation, you need evidence to support your claim, and they are rarely successful. The appraisal contingency clause gives home buyers in this challenging situation a way out.

Final Thoughts on Real Estate Contingencies

You now should have a pretty good handle on the contingencies in real estate. Real estate contingencies can offer buyers much protection in the home-buying transaction.

Including as many real estate contingencies as you think could be needed can be very tempting, but it isn’t always the best choice.

Having a better understanding of the most common contingencies is essential. Understanding the meaning of contingencies in real estate during the buying process should provide a better comprehension of what to include and leave out.

Putting too many clauses in your contract can slow the purchase, though, with help from an experienced real estate agent, you should be able to find the right approach. It should leave you with a contract you are happy with and a seller who isn’t looking for other buyers.