The purchase agreement is one of the most important documents you’ll ever sign as part of a real estate deal. The purchase agreement provides the framework for the entire transaction; it doesn’t matter if you are a first-time homebuyer in the California real estate market or a condo investor looking for options in the booming coastline of the Sunshine State. But this legal document is as vital as dense, making it challenging for the average homebuyer to dig into it. To give you a hand, this article will break down one of the fundamental components of any purchase agreement: the contingencies.
Let’s take a closer look at five common contingencies included in the purchase agreement so you’ll have a better sense of what they include, why they’re important, and what they mean for your house-buying prospects. We will also include actual examples of contingencies on contracts, so you can get familiar with the lingo.
What’s A Real Estate Contingency?
In the real estate sector, a contingency is a clause or condition in a purchase agreement that specifies what must happen or needs to be done for the contract to be legally binding. Before the contract becomes valid both the buyer and seller must accept the terms of each contingency and sign the agreement. A contingency clause can also allow the parties to terminate their agreement under certain conditions that the buyer and seller have agreed on. In other words, real estate offers that have contingencies are “contingent on” the contingencies.
The possibilities are endless when it comes to adding real estate contingency provisions. As a property buyer you may (and have the legal right to) list as many real estate contingencies as you want since these documents are often standardized. However, the inclusion of too many contingencies may make the seller less likely to accept your offer, especially if you are doing business in a hot real estate market.
From the Radon gas inspection to the Kick-out clause, the purchase agreement can include an unlimited (and truly diverse) number of contingencies, as we already mentioned. Even so, we’ll concentrate on the top five most common contingencies:
Financing Contingency
The most common contingency in real estate is the Financing Contingency. The homebuyer should include the financing contingency in the purchase agreement if they’re planning on buying the property using a mortgage, which is a likely scenario in most real estate markets. This type of clause is also known as mortgage contingency or loan contingency.
The financing contingency gives you enough time to apply and obtain approval for a mortgage to buy the home. It states that if you’re unable to obtain financing, you have the option of searching for alternate sources of money or canceling the agreement altogether.
This is an important protection for you as a homebuyer that allows you to get out of the transaction should the stipulations in your contingency not be met. In most cases, this will protect you from rate increases and/or loan denial up to a certain time frame.
With that being said, if you are a first-time homebuyer, don’t be naive and make the common mistake of thinking that your financing is etched in stone just because you are pre-approved. The pre-approval is not a guarantee for a loan but a simple starting point.
Also, be aware that a financing contingency sets out the length of time the buyer has to secure financing for the purchase. This means that you have up to a specific date to terminate the contract as the buyer. If you decide to extend that time, you must send a request for an extension that the seller must accept in writing. Otherwise, you would be automatically waiving this contingency and it is legally required that you buy the property regardless of whether you secured a loan or not.
Financing Contingency Example
“The Buyer’s obligations herein are contingent on the Buyer’s obtaining financing to pay the balance on the Purchase Price. The Buyer must present to the Seller a binding commitment for financing the purchase of the Property within days from the Effective date. The terms of the financing must be acceptable to and approved by the Buyer who shall not unreasonably withhold such approval. In the event that the Buyer fails to obtain financing within the time allotted, this Agreement shall automatically terminate and all funds paid by the Buyer shall be returned to the Buyer after deducting all reasonable costs incurred by the Seller in good faith in relation to this Agreement.” Source.
Inspection Contingency
The inspection contingency, also named due diligence contingency, is a clause that gives the buyer a period of time to get the property they wish to buy professionally inspected. This is beneficial for you as the purchaser because you get a complete picture of the house’s condition. Common state practices differ from one another. In Georgia real estate, the contingency is known as the “due diligence” period, and pretty much any inspection, or whim of the buyer is allowed. Want to check the home for elves? No problem, as long as it’s during the time frame allowed. However, in other states, there might be specifically named inspections that are allowed during this period.
The typical inspection includes internal and external examination plus the systems (structural, electrical, finish, plumbing, ventilation). A professional inspector (paid by you, the buyer) will be in charge of the home inspection and provide you with a detailed report indicating any concerns discovered during the inspection.
Depending on the findings settled in that report, you have a number of ways to proceed. You can move forward with the deal (if everything is ok), request further inspection in some specific areas of the home, request some repairs (or make concessions), or cancel the home purchase agreement and get your earnest money back.
A cost-of-repair contingency usually accompanies the inspection contingency in the purchase agreement to prepare the ground for any necessary repairs. Sometimes, this contingency states a maximum amount of money that might be needed for home restoration.
Inspection Contingency Example
“This Contract is contingent until 9 p.m. on the Day after the Date of Ratification (“Deadline”) for inspections of the property, not including radon or lead-based paint inspections, which require separate contingencies, by the Buyer, a home inspection firm and/or other representative(s) at the Buyer’s discretion and expense. The Seller will have all utilities in service at the time of inspection(s). This contingency will terminate at the Deadline unless by the Deadline the Buyer Delivers to the Seller either A or B:
- A copy of the report(s) from the inspection(s) of the property together with a Home Inspection Notice (see GCAAR Home Inspection Notice) listing home inspection conditions or items that the Buyer requires the Seller to repair, and/or stipulating a dollar credit, as allowed by the lender, to be paid at settlement by the Seller toward the Buyer’s charges to buy the property.
- Notice declaring this Contract void.” Source.
Appraisal Contingency
A home appraisal contingency lets the buyer opt-out of the contract and possibly get the earnest money back, accept the purchase even if the appraisal is below the required amount, or renegotiate the purchase price based on the property valuation. This clause is frequently linked to financing contingency because, in the United States, a good appraisal is one of the requirements for receiving a mortgage.
The contingency states that the buyer must notify the seller of any problems with the appraisal by a specified date. This gives the seller the chance to lower the dwelling price to the appraisal amount.
Let’s use an example for better understanding: If the buyer and the seller agreed on a purchase price of $500,000, but the appraisal shows that the property is worth only $470,000, those extra $30,000 are the buyer’s responsibility. This is because lenders only loan up to the fair market property value. Here’s where you negotiate the price with the seller, seek extra funding, or step out of the deal.
Appraisal Contingency Example
“This Agreement is contingent upon a written appraisal of the Property by a licensed or certified appraiser at no less than the purchase price. Buyer shall, as specified in paragraph 14B(3), in writing, remove the appraisal contingency or cancel this Agreement within 17 (or ) Days After Acceptance.” Source.
Title Contingency
In many states, the title contingency is built into the contracts. No lender will lend on a home without a clear title making it almost impossible to sell a home without a clear title. The title of a house is the document that records its ownership. It’s a legal paper that documents who has owned the property in the past and who is the current keeper. It also includes any liens or judgments that have been levied against the home. The title contingency allows the buyer to request a title search and raise any concerns with the property’s title status, which the seller must validate before closing on the transfer of ownership.
This provision allows you to review any potential easements or contracts on the public record that you may be uncomfortable with as a buyer. If you find something out of the ordinary, you have the option to leave the agreement without having to worry about disputed ownership or pay off someone else’s debts.
However, there are a few occasions where problems with the title report cannot be solved before closing. That’s where the title contingency comes in. It gives you the option to leave the sale rather than having to deal with the possibility of contested ownership or having to pay off someone else’s obligation.
Title Contingency Example
“This transaction and the obligations of Seller and Buyer are expressly contingent on the following: if Buyer, as of the date of closing, is not satisfied with the title to be passed to Buyer, including any reservations, restrictions, covenants and easements of record, then Buyer may cancel this transaction, and Seller and Buyer shall have no further obligations to each other, and Seller shall return the earnest money deposit to Buyer. If Buyer elects to close this transaction, then Buyer agrees it has waived any objection to title.” Source.
Home Sale Contingency
Probably the most hated contingency there is in real estate. The home sale contingency pops up in the purchase agreement when buyers must sell their current house before purchasing the new one. This clause gives you a certain amount of time to market and sell your existing house to pay for the new property.
This contingency protects you because you may back out of the contract without legal repercussions if your existing property does not sell on time. You’ll also walk away from the arrangement with your earnest money deposit still intact.
However, this type of contingency isn’t popular among sellers. Who would put their property on the market without assurance that the buyer would be able to purchase it? You can still choose to include it in the contract, but keep in mind that it detracts from your offer. Under buyer’s market conditions, though, sellers should accept this type of contingency more willingly.
Home Sale Contingency Example
“The Buyer’s obligations herein shall be contingent on the Buyer’s successful sale of Buyer’s property located at [Address] and the closing of such sale on or before. In the event that the Buyer is not able to sell or close the sale on the Buyer’s Property within the time allowed, this Agreement shall automatically terminated and all funds paid by the Buyer shall be returned to the Buyer after deducting all reasonable costs incurred by the Seller in good faith in relation this Agreement.” Source.
Common Contingencies Included In The Purchase Agreement
As you can see, a real estate purchase agreement or contract can include many types of contingencies. It’s important to understand the implications of each one so that you can go into your transaction feeling informed and capable of making the best decisions, avoiding costly and adverse effects. We hope this article has been of help, but if you have additional questions about how a particular contingency might affect you, don’t hesitate to reach out to a qualified real estate agent for advice.
