Understanding Contingencies

Understanding contingencies in the real estate contract is important to a successful transaction. Just because you have a contract does not mean a real estate deal will always go through as expected. There are many things to look out for when it comes to contingencies in the sales contract.

Wikipedia defines a contingency as, “conditions which must be met if a contract is to be performed“.

In other words, contingencies are clauses that suspend the contract until certain events occur. Contingencies can make a contract null and void if certain events don’t occur as defined in the contingency clause.

Most sales contracts contain contingencies of some kind because few people can afford to enter into a real estate purchase without them. But it is possible for a real estate contract not to have any contingencies too; however, this is a rare occurrence.

The most common contingencies include the financing contingency and inspection contingency. For example, the financing contingency details verbiage that if a buyer can’t obtain financing within an agreement amount of time, the contract becomes null and void and the earnest money deposit is refundable to the buyer. Also, if the buyer conducts a home inspection within the allowed amount of time and finds defects that are not to their satisfaction (ie. leaking roof, water in the basement, etc.), the buyer can either ask the seller to cure (or not cure) the defects, get a credit from the seller, or withdraw from the transaction and get their earnest money returned.

What kinds of contingencies are there?

  1. Financing contingency – as described above, if the buyer can not get funding in a certain amount of time then they can back out of the deal.
  2. Home inspection contingency – as described above, if the property does not pass a home inspection then the buyer has the right to either ask the seller to correct or cure the defects, or walk away from the Offer.
  3. Sale of another home contingency – this is basically the “sale of another property” contingency wherein the buyer has another home to sell before they can get financing on their new home. If that is the case, then this contingency should be written into the contract. If the buyer’s existing home does not sell within a set amount of time, the buyer is not help accountable for the purchase offer.
  4. Appraisal contingency – If the property does not meet the appraisal guidelines set forth by the lender, the buyer does not have to uphold their end of the purchase agreement. This contingency can be written into the contract; however, generally falls under the financing contingency as the lender will not give a loan for a house that is worth less than the loan amount.
  5. Well & Septic contingency – if the home is in a rural area where there is no access to city water & sewer, then the water supply is accessed by a well. The well must be inspected, and if it does not pass a health inspection, the buyer does not have to buy the property.
  6. Gap endorsement and Title/Deed commitment – the title report will let the parties know if there are any liens, encumbrances, or easements on the property. If this contingency is written into the contract and they are not acceptable to the buyer, they can walk away and not be held accountable. Something simple like a seller forgetting to mention the oil company holds the mineral rights on the property and can drill anywhere it wants, may make a buyer think twice about buying the property.
  7. Attorney Approval Contingency – some buyers prefer to have their attorney review and approve of all the legal documents associated with the Offer To Purchase, so they write an attorney approval contingency into the offer. This allows them to make necessary modifications to the verbiage and/or add provisions to the Offer with the advice of their attorney.

These are just some of the many contingencies which can be listing in an Offer To Purchase. There are many more. It is up to the buyer and seller to work out as many of these so they can to seal the deal. Many contingencies are almost always time of the essence meaning they have a deadline from the date the offer is accepted. Sometimes because of short deadlines and/or failure to come to a successful compromise, it just does not happen and the deal doesn’t go together. Each party must then move on to the next house or buyer.

Once contingencies are cleared, the buyer can lose the escrow monies if he/she chooses to withdraw from the transaction. Therefore, the analogy I like to demonstrate to buyers is to think of contingencies as open doors in a transaction. These doors represent an opportunity for the buyer to walk away from a deal. Therefore, the seller will try to close these doors as quickly as possible and put time frames on each of the contingencies for good reason. Again, time is of the essence when it comes to contingencies.

So what makes a “good” contingency?

A “good” contingency answers the questions WHO, WHAT, WHEN and  WHAT HAPPENS IF…  But, most importantly, it “captures the intent of the parties involved”. The buyer and seller are the people this contract is for, so is it doing what they want and understand? If so, then you have a “good” contingency. Just make sure the contingencies are clear enough that an uninvolved person can read it an know what it means. If you were to pull a random person off the street and show them the contingency – would they be able to understand it and know what it means?

Get a top-notch negotiator like Ron Reed on your side to help structure an Offer so that it is great for you and acceptable to the seller. Don’t leave money on the table, and make sure you ask for the right contingencies to protect you throughout the transaction.  For more information, contact Ron Reed at 608-395-3005 or email ronreed@restainohomes.com – or just fill out the form below.

 

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