The word “contingent” is defined as “subject to chance,” something that no one wants to hear in a real estate transaction. However, every contract to purchase real estate is likely to have contingency clauses. It’s up to both the buyer and seller to understand what the chance you are taking is and either assume the risk or don’t sign the contract.
Contingent clauses are commonly attached to an offer to purchase real estate and are included in the real estate contract. Essentially, a contingency clause gives parties to the contract the right to back out of the contract under certain circumstances that must be negotiated between the buyer and seller.
Virtually anything can be written into a real estate contract as a contingency, from the replacement of a roof to including the owner’s boat in the sale, but the most common items are as follows:
- Financing Contingency: A financing contingency or a mortgage contingency gives the buyer time to apply for and obtain financing for the purchase of the property. This protects the buyer, who can back out from the contract and reclaim their earnest money in the event they are unable to secure financing from a legitimate lender. Keep in mind that in today’s real estate culture, most sellers will want to see a mortgage preapproval from a buyer before they enter into a transaction with them.
- Appraisal Contingency: Contracts that include a financing contingency will also contain an appraisal contingency. If an appraisal by an independent appraiser comes in under the agreed-upon purchase price, the contract can be canceled or the price and/or terms can be renegotiated.
- Home Sale Contingency: This gives the buyer a specified amount of time to sell and settle their existing home in order to finance the new one. Again, this protects the buyer but puts the seller at a disadvantage since their property is basically off the market. This was done all the time in the good old days of real estate when most buyers and sellers had more patience, and the real estate market was not as competitive.
- Inspection Contingency: This allows the buyer to have the home inspected within a specified time period, typically five to seven days. It also protects the buyer, who can cancel the contract or negotiate repairs based on the findings of a professional home inspector. There is also a required termite inspection from a qualified termite inspector in order to obtain financing.
These are the standard contingencies, but I recently read about an innovative contingency regarding the buyer’s job status that’s happening with the job market in turmoil, especially in the tech sector. It’s known as the employment contingency, stating that if the buyer is laid off from their job before closing, they can back out of the deal. There could be a 30-day or more time frame for the buyer to find another job that will still qualify them for a mortgage, but either way it’s a dicey position for a seller to be in. Nevertheless, with the real estate market getting softer, buyers feel more confident asking for contingencies compared to a year ago.
The process of purchasing real estate is fraught with chance; the chance you may not find the right home, the chance that your offer will not be accepted, the chance the home will not pass inspection and the chance that your financials may not allow you to purchase the property. Think of contingency clauses to your contract as just one more chance you have to take in a lifetime of chances.