Main Content

Home » What Are Contingencies in Real Estate? By

What Are Contingencies in Real Estate? By

What Are Contingencies in Real Estate?

Buying a house is a huge deal—both figuratively and literally! It’s probably the most expensive purchase you’ll ever make. Not only does it cost a lot of money, but it’s also a big emotionalinvestment. This could be the place you raise your kids! You want to make everything goes as smoothly as possible.

When the seller accepts your offer, you’ll enter into a contract to buy the house. And good Lord,this contract is massive. It covers everything from the agreed-upon price to the date you pick up your keys. And if your real estate agent is doing their job, it will also include some contingencies.

Wait. What? That’s right: Most home sale transactions usually come with a few strings attached to make sure both parties are getting what they need.

At this point, you may be asking yourself, What kind of contingencies? That’s a great question! Let’s get into it.

What Are Contingencies?

Think of real estate contingencies as conditions that must be met to ensure that the sale goes through. But they aren’t necessarily bad. There are lots of things that can cause a deal to fail, and contingencies can help to make sure you walk away from the deal without losing your shirt!

Contingencies protect the buyer and seller from things that could go wrong in the transaction.

What Are Common Types of Contingencies?

There are four main contingencies written into most real estate transactions: appraisal, home inspection, financing and home sale contingencies. Each of these is important to a sale contract. Let’s take a closer look at them:

1. Appraisal

No one (literally no one) wants to pay too much for a house. An appraisal will make sure you know the fair market value of the house before the sale closes. If the appraised value is less than the sale price, an appraisal contingency allows the buyer to back out of the contract or negotiate a lower price with the seller. Keep in mind that your lender won’t want to underwrite a loan for more than the house is worth.

2. Home inspection and repairs

A home may look fantastic on the outside, but it might need thousands of dollars of hidden work on the inside. And you don’t want to buy a housing lemon. With a home inspection contingency, you have the right to have a professional inspect the home. Then, if the inspection turns up major problems—like a hole in the roof or a crack in the foundation—you can ask the seller to fix the problems, reduce the price, or cancel the contract.

In a hot housing market, you might be tempted to skip the home inspection contingency to make your offer more appealing. Do not do this! Always have a pro inspect the house first. Otherwise, you could end up paying too much for a home with expensive structural issues—and that could cost you thousands of dollars later.

3. Financing

A financing contingency gives the buyer a certain amount of time to get approved for a mortgage. Let’s be clear here: You need to be preapproved for a loan before you even make an offer to avoid trying to buy a home you can’t afford. Being preapproved also speeds up the loan-approval process once you do make your offer. But even with preapprovals, people get into housing contracts every day only to have their financing fall through at the last minute. That’s why this contingency comes in handy.

Now, if you’re the type of buyer who pays cash for a home (our favorite type of buyer), you don’t need to include this contingency in your contract. Purchasing with cash can be a huge plus to sellers who don’t want to wait for a buyer to secure financing.

If you do need to take out a mortgage, we recommend a 15-year fixed-rate mortgage with at least a 10–20% down payment. If you’re following our Baby Steps and are ready to buy a house, talk to our friends at Churchill Mortgage. They’ll help you get your financing ducks in a row so you’re ready to put your best foot forward!

4. Home sale

Sometimes you need to sell your current house before you can buy a new one. That can be kind of rough for the seller, who can miss out on another offer while they’re waiting for you to close on your old house. Because of this, sellers usually attach a kick-out clause to this contingency. This is basically a sell-by date so the seller can move on if you can’t get your current house sold.

You also want tomake sure you’re not making two mortgage payments. It might make more sense to sell your house first and rent for a while. That way, you won’t have to worry about this contingency at all.

Okay, these are big ones—and they’re all good reasons to work with an all-star real estate agent. Because if any one of these contingencies is left out of your contract, it could cost you thousands of dollars.

Other Contingencies

As you can see, contingencies protect buyers from paying too much, ending up with a home that has major structural issues, or being forced to buy a home without proper financing. But sellers benefit as well. If all the conditions are met, the buyer can’t back out of the purchase without financial or sometimes legal consequences.

However, you need to be cautious about using too many contingencies. While some are necessary, many sellers don’t want to deal with a buyer who puts conditions on everything. If your real estate agent knows what they’re doing and has the heart of a teacher, they’ll educate you on whether or not you should include certain contingencies. So be careful with these:

  • Title contingency: If there are problems with the title—like any liens or judgments against the property—it gives the buyer the option to walk away instead of dealing with any contested ownership claims. For example, that can happen if the house is being sold as part of a will or divorce—and things can get ugly. The last thing you need to deal with in your new home is 17 distant cousins of the previous owner coming out of the woodwork and claiming they own the home you just bought. We also recommend title insurance to protect you from any unknown catastrophes in this area after the sale.
  • Insurance approval: Apply for insurance as soon as you put down your earnest money! Why? If you find that you can’t get insurance for some reason (or the insurance is outrageously expensive), you should be able to walk away. Things like previous claims for mold or an old roof can make a house difficult to insure.
  • Final walk-through: It’s common to take a final walk-through the day before closing. Do not skip this step! You want to make sure there hasn’t been any serious damage to the property since you entered into the contract. You’ll also want to check that all agreed-upon repairs have been made. If you show up for the walk-through and it looks like a college fraternity just finished an initiation ritual in the living room, you should have recourse to back out.
  • Attorney review: You may wish to include a clause that allows your attorney to review the contract for a period of time before closing. They can make sure nothing has been removed or sneaked into the contract without your knowledge and that everything is kosher before closing.