Most Common Contingencies in Real Estate | DOBI
 

Most Common Contingencies in Real Estate

Everything You Need to Know

In real estate, a contingency refers to a clause in a purchase agreement specifying an action or requirement that must be met for the contract to become legally binding. Both the buyer and seller must agree to the terms of each contingency and sign the contract before it becomes binding.

We’re breaking down the contingencies you’ll likely see most in a real estate transaction and how it works for buyers or sellers.

6 Common Contingencies

1. MORTGAGE CONTINGENCY

This clause specifies a window of time in which the buyer must obtain financing to purchase the home. If the buyer doesn’t secure a loan by that deadline, they can withdraw from the deal without penalty and the seller can put their home back on the market and choose a different buyer.

2. Title CONTINGENCY

This provides the purchaser the right to obtain a title search and raise any objections to the status of the title to the property, which must be cleared by the seller in order for the purchaser to close on the transfer of title.

Woman with paperwork

3. HOME INSPECTION CONTINGENCY

This clause involves the window of time the buyer has to get the property they plan to purchase professionally inspected. The home inspection helps ensure there are no serious issues, such as a leaky roof, a faulty electrical system, or structural defects. If it turns out the property has defects, and the seller elects not to repair or remediate the issues which are raised by the buyer, the buyer can terminate the contract.

4. SALE OF A PRIOR HOME CONTINGENCY

This protects buyers who need the cash proceeds from the sale of their existing home to be able to afford a new home. With this type of contingency, if the buyer needs to sell their current home first by the deadline indicated in the contract, but they cannot find a buyer, they can escape the real estate contract.

DOBI agent, Scott Pulus, shares this type of contingency is most common in our current market, because buyers need to ensure their current home is sold or sellers need to ensure they have a place to go once their home sells.

5. APPRAISAL CONTINGENCIES

Appraisal contingencies safeguard the buyer by saying that the property must appraise for the indicated sales price, at minimum, or the contract can be nullified. This is because banks don’t like to loan money to borrowers for a house that costs more than it’s worth. This clause may also indicate that the seller can opt to reduce the price to the appraised value.

6. HOMEOWNERS INSURANCE CONTINGENCY

This clause says that the buyer must apply for and obtain homeowners insurance on the property. If they can’t get the necessary insurance, either party can withdraw from the contract. This is often requested by either the seller or the mortgage lender.

If a contingency isn’t met, either the buyer or seller may consider the contract null and void without penalty. This also allows either party to cancel the deal and pursue other prospects, should the conditions not be met.

For example, when a property under contract doesn’t appraise for its expected value, the financing for the purchase is put at risk of cancellation. “Here, the buyer or seller can either choose to cancel the contract, appeal the appraisal, or mutually renegotiate the purchase price to accommodate for the [lower] appraised value,” Del Rio says. Indeed, either or both parties can suggest compromises and reopen negotiations in the hopes of keeping the deal from falling through.

If the buyer is unable to get the mortgage loan they need to purchase the property, they would typically have the right to terminate the transaction, but the parties can always agree on additional time for the buyer to continue to pursue other avenues to obtain the loan.

CONTINGENCIES + EARNEST MONEY DEPOSIT

Contingencies are also tied to the earnest money, or “good faith deposit,” a buyer often surrenders when going under contract on a home. If a contingency isn’t met, the buyer usually gets that deposit back.

Sources:
https://www.bankrate.com/real-estate/contingency-clause/

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