If this is your first time buying a home, you might feel a bit intimidated by the purchase contract. Contracts are often filled with industry and legal terms making them difficult to understand for the average buyer and seller.
Contingencies in particular give some buyers and sellers cause for concern because their contract depends on the contingencies being fulfilled. However, in most cases contingencies are pretty standard and only serve to protect the interests of both the buyer and seller during a real estate transaction.
In today’s post, I’m going to give you an introduction to contingency clauses and break down some of the most common contingencies you’ll find in today’s real estate purchase contract.
Contingency clause definition
Simply stated, a contingency clause is a statement within a contract that requires a certain event takes place before the contract is considered legally valid. As a result, contingency clauses are used to cancel or invalidate a contract if certain conditions aren’t met before the sale is made final. So, if one party fails to meet the obligation of the contingency, the other party is no longer bound by the contract (or required to buy or sell the house). Any contingency clause that is entered and becomes part of the contract must have a date specified for that particular contingency to be satisfied. It is always best practice to keep these dates realistic in time frames, and to adhere to the overall duration of the offer contract. If a contingency date goes by without being completed, the offer is negated or no longer in force. If a buyer anticipates a problem in adhering to a contingency date, they can request an extension. This extension must be agreed to by both parties in writing to extend the contract.
Contingencies can get confusing when they are vaguely worded , making them difficult to interpret. For the standard contingencies below, it is fairly easy to understand there purpose, time frames and what they are for.
The other instance in which contingency clauses can be confusing is when a party includes a contingency that is atypical for a real estate purchase contract. Buyers and sellers alike should be wary of unusual contingencies, explore what the intent of the specific language is. Only when these unusual contingencies have been fully understood and agreed by both parties, should the contract be signed. An experienced Realtor and or attorney shall be able to provide guidance.
The main contingencies in a offer to purchase
Appraisal contingency. Designed to protect the buyer, appraisal contingencies require that a home is appraised at a minimum amount, which is stated in the contract. It is very common to see appraisal contingencies written on most offers, especially if there have been multiple offers. When multiple offers are received, the ultimate sale price tends to be above asking. It is always a best practice for any Buyer agent to include and appraisal contingency in this instance, as this will protect their buyers interest and assure that the investment is a good value.
Financing contingency. Another contingency geared toward protecting buyers is the financing contingency. It states the number of days that a buyer has to secure financing for the home. This allows the buyer to cancel the contract (and offer) if they’re unable to secure suitable financing for the home. The time frame for finance contingency on an average offer is approx. 35 days but can vary based on the duration or overall time frame of each specific offer.
A particular area of scrutiny for a finance contingency is the percentage of money that a buyer will be putting down. This percentage can vary based on a buyers financial position. The more money put into the deal the better for a seller as this shows financial strength of the buyer and results is less money being borrowed. From the lenders perspective a healthy LTV or loan to value is favorable as this shows borrows will have more equity in the purchase and are less likely to default on the loan. If they do, there is more chance for the bank to recoup the mortgage on the property.
Inspection contingency. One of the most important and most common contingencies is the inspection contingency. It allows the buyer to have the house inspected by a licensed professional within a certain number of days. The most common time frame for a home inspection is 7-10 days after an offer to purchase has been agreed upon and signed by all parties. This contingency protects the buyer against unforeseen expenses and repairs that will need to be made in the near future. Many contingency pages on a offer to purchase will allow inspections on a myriad of aspects in a home. They can include all mechanical aspects such as wiring/electrical components, furnace/boilers, roofs, windows, siding, appliances. Also typically included will be any structural items, a pest and radon inspection.
House sale and kick-out contingencies. A house sale contingency gives the buyer a certain number of days to sell their home before financing a new one. However, since this can be a risky clause for sellers, a kick-out clause is often included. This contingency allows the seller to keep the home on the market and entertain other offers while the buyer secures financing and sells their other home or homes. You tend not to find these contingencies being used in busier markets when buyer demand is high and inventory is tight. This can be a vital and welcome contingency for a Buyer who is able to find a cooperative Seller, which can produce a win-win for both parties.