Many buyers and sellers have asked what a contingency in real estate means.
A contingency is a requirement that must be met for a real estate contract to become legal and binding.
A Real estate contingency is something that all buyers, sellers, and agents should be intimately familiar with.
Real Estate contingencies are an integral part of most contracts. If you are buying or selling a home, there are real estate contingencies you should know.
Whether buying a home to live in or investing in property for a return, contingencies can help you avoid a costly mistake.
Contingencies in real estate give you more control over the home-buying process with a get-out clause if things don’t go as expected.
You must know how to apply home-buying contingencies because purchasing a property involves entering into a legally binding contract with the seller.
With a better understanding of the real estate contingency process, you can enter home purchase negotiations with more confidence and knowledge. If you are a first-time homebuyer, it will be beneficial.
Our guide should give you the information to successfully navigate contingent contracts in real estate deals.
From my experience as a Realtor for the past three decades, I know that many buyers and sellers do not fully understand a contingent offer. Real Estate agents need to carefuly educate their clients so they make wise decisions.
Let’s take an in-depth look.
What is a Real Estate Contingency Contract?
As mentioned, a real estate contract contingency requires completing certain things for the home purchase to continue.
An action has to occur to allow the contract to become binding and the sale to head toward closing.
While the real estate contingency offers buyers protection, it has its downsides. Contingencies can slow down the home-buying process and make it more challenging to negotiate the purchase contract.
The home seller is more likely to want to deal with buyers with fewer contingencies, as it offers less risk and speeds up the sale.
Not every home purchase is the same. In some cases, it will be better to have more contingencies than others.
Noteworthy Facts and Statistics
1. Conditions or clauses in a real estate contract must be met for the sale to proceed.
2. Common contingencies include financing, inspection, and appraisal contingencies.
3. A financing contingency allows the buyer to back out of the contract if they cannot secure a mortgage loan.
4. An inspection contingency gives the buyer the right to inspect the property professionally to identify potential issues.
5. Appraisal contingencies allow the buyer to cancel the contract or renegotiate if the property’s appraised value is lower than the agreed-upon purchase price.
6. Approximately 90% of real estate transactions in the United States include some form of contingency clause.
7. The most common type of contingency is home inspection contingencies, which are present in over 80% of real estate contracts.
8. About 70% of real estate contracts include a mortgage contingency to protect buyers if their loan application gets rejected.
9. Less than 15% of real estate deals fall due to failing to satisfy a contingency.
10. On average, real estate contingencies add 2-3 weeks to the closing process.
What’s Found in Purchase and Sale Contracts?
Generally, contracts to purchase real estate need to include specific essential details about what is expected to happen and when. These will include:
- The names of the parties involved, i.e., the buyer and seller.
- The address of the property and description of the home.
- The real estate companies engaged in the sale, if there are any.
- The offer price the parties have agreed to.
- The amount of the earnest money deposit.
- Who is holding the earnest money?
- What kind of escrow account will the deposits be held in?
- The amount of the buyer’s down payment.
- The mortgage amount the buyer is financing.
- When the buyer needs to apply for their mortgage.
- The date by which the buyer needs to have their mortgage commitment.
- Additional terms of the sale.
- The final walkthrough date.
- The anticipated closing date.
- Any Real Estate contingencies – below, we will discuss typical contingencies in a purchase and sales.
Homebuyers can add contingencies to the contract to suit their situation and requirements.
The Role of Earnest Money in Real Estate Transactions
An earnest money deposit is a sign of good faith from the buyer, demonstrating their commitment to the transaction. To show their commitment, buyers often include an earnest money deposit in their offer, which contingencies can protect.
This deposit is typically held in an escrow account.
If any contingencies are unmet, the buyer may have the right to get their earnest money back without penalty. This financial safeguard underscores the importance of carefully negotiating and understanding contingencies. They directly impact the security of the earnest money deposit and the overall transaction.
I constantly review the standard real estate contingencies with my buyer and seller clients. Mistakes are easier to make when they are not intimately familiar with them.
Contingency Contract Rules
The contingency is a clause that needs to be met by either the buyer or the seller, or both to continue with the sale.
If necessary, you can negotiate with the seller over the contingencies applied to the contract. This should ensure that you are protected during the home purchase and that the seller is happy with the arrangement.
It is advantageous to understand how contingencies work to avoid confusion and think you need to push for certain contingencies that aren’t important or necessary to the situation.
Contingencies are conditional; the contingency will remain valid if the specified task is completed in the time allowed. If the conditions aren’t stuck to or met in time, the purchase contract will not continue to apply.
Set a deadline. Since home sales often need to be completed by a set time, deadlines must include timeframes for contingencies.
What is a Contingency Period?
There are deadlines and contingencies in real estate contracts. It is referred to as the real estate contingency period.
Having deadlines should ensure the process continues progressing with fewer unnecessary delays. With clear deadlines, the buyer and seller can be held accountable for delays.
Contingencies in a real estate offer must be specific; the contingency details must accurately describe what must happen. They cannot simply be a general wish for some action.
The clause must state precisely what outcome to meet so that there is no doubt about completing the contingency.
For example, a mortgage contingency clause will state a time frame by which a buyer needs to procure financing. The buyer’s lender will provide a commitment letter stating that the buyer has gotten funding.
Ensure the agreement is binding; there is less of a requirement to stick to the terms without a binding contract.
A binding contract will ensure the buyer and the seller know and carry out their responsibilities. There also needs to be a plan for what to do if these obligations are unmet.
Common Contingencies Found in Contracts
Let’s look at some contingencies you might consider adding to the real estate contract. These are the most common contingencies in real estate sales.
While the time frame for getting real estate contingencies can be done is negotiable, it often is ten days. When someone asks what a ten-day contingency in real estate is, they are referring to this.
It is also known as the real estate contingency period, as mentioned.
The Home Inspection Contingency
Every buyer should use a home inspector’s services to ensure they aren’t buying a property that will be more trouble than it’s worth. The home inspection contingency is vital to protect the buyer’s interests and ensure they have enough time to assess the property.
As a buyer or seller, you can see an excellent home inspection checklist to familiarize yourself with the home inspection process.
The contract will set out a real estate due diligence period of weeks or just a few days. The purchaser must arrange for the home inspector to visit within this period.
The home inspection result will give the buyer a report with details of the home and any problems the inspector uncovered.
What is checked during the home inspection can vary depending on the house and its location, but typically, you can expect the inspector to cover certain possible problem areas. These include structural issues, basement and foundations, plumbing and electrical systems, HVAC, pests, radon gas checks, etc.
Unless the house is virtually brand new, you can expect the inspector’s report to highlight some areas of concern. You must consider carefully if the issues revealed in the report are severe and costly enough to return to the seller to renegotiate.
Sometimes, the home inspection is lumped into a due diligence contingency. Buyers can thoroughly investigate the property and negotiate or withdraw based on their findings.
Home Inspections Are Often Negotiated
There are a few options here. You can ask the seller to complete the repairs, negotiate a lower offer price for the home, or walk away from the deal. In most sales, there will be some negotiations regarding the home inspection.
Many of the things the inspector will find are likely minor, and pushing for the seller to fix these or give you a discount for everything highlighted might be unfair and unrealistic. This will only frustrate the seller, perhaps causing them to want to find another buyer.
If you are happy with the deal you negotiate with the seller or the home inspector doesn’t find anything significant, you can move on toward closing.
A home inspection is one of the most common contingencies in real estate.
The Mortgage Financing Contingency
For many, a mortgage is crucial to getting the house of their dreams. The financing contingency helps out buyers who don’t get the expected loan they need to purchase the home.
While they might have had pre-approval for a mortgage, something could have changed in their financial situation before they finally applied to the lender.
They may have taken out another small loan or missed payment without realizing that this could affect their credit score and their chances of getting the funding they thought they had already been approved for.
With a lower credit score, buyers could find trouble securing the loan they need to buy the home from any lender.
The mortgage contingency clause allows them to walk away from the purchase agreement without facing the problem of breaking the contract and losing their earnest deposit.
Example Mortgage Contingency Clause
Here is a real estate contingency clause example for a buyer needing to procure financing:
To finance the purchase of the specified property, the buyer will apply for a mortgage loan of X amount of dollars at prevailing rates, terms, and conditions.
If, despite the buyer’s diligent efforts, a commitment for a loan cannot be granted by X date, the buyer shall have the right to terminate this agreement by written notice to the seller or broker representing the seller. Notice shall be given before the expiration of such time, whereby all deposits made by the buyer shall be refunded.
A buyer must notify the seller by the specified date to get their deposit back.
Contract dates are an excellent example of how consumers must understand and follow real estate contingencies correctly. Failure to do so could cost you a lot of money.
The Appraisal Contingency
Another real estate contingency you need to know is the lender’s appraisal. Mortgage lenders don’t like the prospect of loaning more money to purchase the property than the home is worth.
They know some customers will fail to keep the mortgage payments and potentially enter foreclosure.
If they have loaned more money than the home is worth, they stand to lose out due to foreclosure. Given this, they need an appraisal of the house’s value.
A professional and licensed appraiser will find the property’s actual value.
Appraisers will visit the home, take measurements, take photographs, and assess the neighborhood. They will compare the property to other houses to accurately determine the fair market value. Many factors can influence appraised value.
The appraiser will create a report based on their market value assessment. If the appraisal is lower than the buyer has agreed to pay for the home, there could be problems. This is known as an appraisal gap.
An appraisal gap means the buyer must find the value difference, as the lender won’t be able to loan the total amount. This will mean they cannot continue purchasing homes for many people.
While it is possible to dispute an appraisal valuation, you need evidence to support your claim, and they are rarely successful. The appraisal contingency clause gives home buyers a way out of this challenging situation.
An accurate comparative market analysis upfront is vital.
Appraisal Contingency Example
The sale of 55 Main Street Hopkinton, Massachusetts, is subject to the property appraising for the purchase price or higher. If the appraisal comes in lower than the purchase price, the buyer shall have the right to terminate this agreement.
Dealing With Appraisal Gaps in Real Estate Sales
In today’s real estate market, appraisal gaps have become a common hurdle due to bidding wars. An appraisal gap occurs when a property’s appraised value falls short of the agreed-upon purchase price.
This situation poses a challenge for buyers, who must decide whether to pay the difference out of pocket, renegotiate the deal, or walk away if an appraisal contingency protects them.
Understanding how to deal with appraisal gaps is essential, especially in competitive markets where high demand can drive prices above appraised values.
I recommend buyers prepare for this possibility by discussing strategies with their real estate agent. This comes up quite a bit with my clients.
The House Sale Contingency
If the buyer has a home they need to sell to have the finances available to purchase, there can be problems. If there is some delay, or they can’t find a buyer for their home, it can significantly inconvenience the other seller.
This house sale contingency clause allows the buyer to walk away from their purchase agreement if they cannot sell their home when they expect.
The home sale clause is the least acceptable of all the real estate contract contingencies.
A home sale contingency creates tremendous risk for a seller. You are essentially putting faith in a buyer that they will do everything necessary to sell their property.
You have no idea if they will price their home correctly, hire an excellent real estate agent, and market it well.
Of all the real estate contingencies, as a seller, this is usually the one you’ll want to say—”Hell no!”
Sellers can protect their interests by including a kick-out clause, allowing them to accept another offer if the buyer’s contingencies cause delays.
Right of First Refusal Contingency
A right of first refusal clause gives a buyer the opportunity right but not the obligation to enter into a real estate transaction before others can. Purchase contracts involving homes can contain a right of first refusal.
Other examples of the first right of refusal include a condominium association’s ability to purchase a unit before it was listed for sale.
If the holder of the right of first refusal does not wish to proceed, other buyers can move forward with a purchase contract.
The Kick-Out Clause
A kick-out clause will give a seller the right to continue marketing a home if they receive an offer with contingencies or conditions that need to be met.
While most of the clauses we’ve looked at here protect the buyer, this one is definitely for the seller. If the seller has a buyer holding things up because they cannot sell their home, this clause can help.
The kick-out clause will give the buyer protection if they struggle to find a buyer for the property they own, which can delay their purchase. A kick-out clause allows the seller to continue marketing their property. It also allows them to switch to another buyer should they qualify to complete the sale.
The kick-out contingency clause can end the seller’s frustration by switching to a buyer who can close sooner. It is real estate terminology not many people are familiar with.
The Clean Title Contingency
A title search will ensure that the seller legally owns the property and that any liens on the property have been resolved before the sale. Conducting a title search ensures no liens or disputes could affect the property’s transfer.
Doing so will be done via a lien search. A title company or attorney will check the records to ensure everything is in order, allowing the sale to proceed. A title contingency helps protect buyers from unforeseen encumbrances that could complicate the property’s transfer.
There can be problems, however. While closing, the issues uncovered in the title search can usually be fixed, but this isn’t always true.
If the seller hasn’t proven they own the property, the dispute over ownership can be difficult for the buyer. If the buyer still needs to pay a lien on the home, it may be better to break away from the deal and start looking for another property.
A title contingency helps protect buyers from unforeseen encumbrances that could complicate the property’s transfer.
Most attorneys, and rightfully so, will recommend a buyer purchase title insurance. It is almost always money worth spending.
Video: What to Know About Title Insurance
See why having title insurance is this quick and easy-to-understand video.
The Home Insurance Contingency
The home insurance clause can sometimes be a requirement. The lender wants to see if the purchaser has taken care of insurance before releasing the funds. While this might be easy for the purchaser to complete, there can be difficulties.
Obtaining the insurance needed for a home in certain regions more susceptible to natural disasters can be more challenging. Without insurance, the lender won’t approve the mortgage. The contingency clause allows the buyer to walk away with their earnest deposit returned.
The Right to Assign Contingency
This clause is more unusual as it is only relevant to wholesale investors. Wholesale investors agree to purchase properties and then sell them to other investors at wholesale prices. They do this by closing simultaneously or assigning the purchase agreement to the new investor.
The right-to-assign clause protects the wholesale investor if they cannot pass the purchase agreement to the new investor. The other investor might have problems with financing, leaving the wholesaler with a property contract they don’t want to purchase.
Miscellaneous Contingencies in Contracts
A contract can contain the following additional real estate contingencies. Use this real estate contingencies list to craft your next offer.
- Radon contingency
- Pest or rodent contingency
- Mold contingency
- Asbestos contingency
- Lead paint contingency
- Septic system inspection contingency
- Well-water inspection contingency
- Wetlands contingency
- Land survey contingency
Another Contingency Clause Example Using Radon as a Reference
The buyer may have the property inspected for radon gas by X date. At their own expense, if the radon test indicates the presence of radon gas above the required levels by the Federal Environmental Protection Agency, the buyer shall have the right to revoke the offer under the terms of this contract to the seller or their broker by X date. The test results shall accompany such notice.
There are many real estate contingencies buyers and sellers should have a firm grasp of before executing a contract.Click To TweetUnderstanding Contingent Listings and Their Impact
When buying or selling, distinguishing between a contingent listing and a pending sale is crucial. A contingent listing indicates that the seller has accepted an offer, but certain conditions or contingencies must be met before the sale can be finalized.
This stage offers potential buyers hope, as deals can still fall through. It can open the door for new offers. On the other hand, a pending sale is further along in the transaction process. All contingencies have been met, and the sale is nearing closure.
Understanding these nuances can provide strategic insights, especially in competitive markets where every advantage counts.
Can Contingencies Allow You to Make an Offer when The Sale is Pending?
It is usually possible to make an offer if the home is listed as pending. However, the chances that it will be successful are low. When someone asks what contingent means in real estate, it refers to the status in the multiple listing service (MLS).
A real estate agent can make choices when a contract has been accepted between buyer and seller. The agent can choose to mark the property as contingent or pending.
In both circumstances, a contract has been accepted. The differences between the two statutes are discussed in the reference above.
If the sale falls through, there could be an opportunity, but don’t bank on that. If the sales contract includes a kick-out contingency, where the seller can choose another buyer if they are in a better position to purchase, you stand a better chance.
Sometimes, a buyer will offer a backup hoping the transaction will fall through. Understanding the difference between a contingent listing and a pending sale can give buyers a strategic advantage in a seller’s market.
What Does Having No Contingencies Mean in Real Estate?
When a real estate agent hears, there are no contingencies; this is music to their ears. It simply means a buyer has not added any contingencies to the contract.
Not having contingencies in real estate is a big deal because the likelihood of the transaction closing increases dramatically.
A cash sale with no home inspections holds significant weight to a seller in most deals.
Quite often, when there is a bidding war on a home, eliminating these contingencies could be the difference in winning, even if another buyer has offered more money.
You must remove as many contingencies as possible to increase your chances of landing a home.
Should You Waive Contingencies?
The decision to waive contingencies in real estate is personal and often depends on the type of real estate market.
Buyers frequently waive contingencies in a hot seller’s market to improve their chances of securing a home.
When multiple offers are presented to a seller, the probability of having no contingencies increases.
In a buyer’s market, waiving contingencies in real estate contracts rarely happens.
What are the Most Commonly Used Contingencies?
For a buyer, financing and inspection contingencies are the most important. These are the typical contingencies in 95 percent of all real estate transactions.
The financing contingency ensures that you are protected should your mortgage application not proceed as anticipated.
The inspection contingency ensures you don’t commit to purchasing the property without finding out what the home inspector has to say. The home inspection should prevent you from buying a house you later discover has severe and expensive faults.
If the home inspector’s report uncovers that it needs more repairs than you are happy with or cannot secure funding, these contingencies allow you to leave the deal with your earnest money deposit returned.
Things to Look Out For
The many moving parts of a home-buying transaction are pervasive for problems to arise. Real estate contingencies offer a safeguard to exit the contract with your deposit intact.
However, including more contingencies in the contract involves some risks. Sellers tend to find contingencies less helpful than buyers, meaning they are less likely to agree to a deal with many contingencies.
Real estate contract contingencies are less likely to happen in a hot market where the seller can easily find another buyer.
Know The Current Local Market
Understanding how the local market is currently performing will help ensure that you don’t overplay your hand with more contingencies. Your real estate agent should be able to advise you on the current local situation.
Even in a seller’s market, the owner shouldn’t be put off accepting your offer because a few contingencies will be expected. The home inspection and financing contingencies are likely present in most real estate contracts, so you shouldn’t have to worry if you are sticking to those.
If you are looking to buy the property as an investment, you should be able to understand the local market before proceeding.
It would be best to look at how many homes are on the market and how quickly they are being sold. The average days on the market should provide the information needed to decide what contingencies you can include.
Final Thoughts on Contingent Contracts
It would help if you now had a good handle on real estate contingencies. These can offer buyers much protection in the home-buying transaction.
Including as many real estate contingencies as you think are necessary can be very tempting, but it isn’t always the best choice.
Understanding the most common contingencies is essential. Understanding the meaning of contingencies in real estate during the buying process should provide a better comprehension of what to include and leave out.
Putting too many clauses in your contract can slow the purchase, though, with help from an experienced real estate agent, you should be able to find the right approach. It should leave you with a contract you are happy with and a seller who isn’t looking for other buyers.
Hopefully, you now understand the typical contingency clauses in real estate sales better. Let me know if you have questions about a particular contingency. I would be happy to assist.
FAQs
Here are essential questions and answers about home-buying contingencies.
Why Are Housing Contingencies Necessary?
Real estate contingencies are crucial in any property transaction, providing protection and flexibility for buyers and sellers. These contingencies serve as safeguards, allowing parties to withdraw from the deal under certain circumstances without facing legal or financial penalties.
They typically cover various aspects such as financing, home inspections, appraisals, and selling the buyer’s existing property.
Including contingencies in a real estate, contract ensures that all parties can address potential issues or concerns during the transaction process. This ultimately promotes transparency and reduces the risk of disputes.
Can Contingencies Be Waived or Removed?
Under certain circumstances, buyers or sellers can waive or remove real estate contingencies. Real estate contracts usually include contingencies to protect both parties from unexpected events, but there are situations where one party may be willing to waive or remove a contingency.
This could occur if the buyer has conducted thorough due diligence and is confident in the property’s condition or if the seller receives a more favorable offer without contingencies.
However, both parties should waive or remove contingencies cautiously, as this can expose them to potential risks. It is always advisable to consult with a real estate professional or attorney before making any decisions regarding contingencies.
How Can I Negotiate Favorable Contingencies in a Deal?
When negotiating favorable contingencies in a real estate deal, it is crucial to approach the process strategically. Consider thoroughly researching current market conditions and property values to understand the potential risks involved better.
This knowledge will enable you to identify areas where you can negotiate contingencies that favor your interests.
Additionally, it is advisable to enlist the services of an experienced real estate attorney who can guide you through the negotiation process and help you draft contingency clauses that protect your investment.
You can increase your chances of securing favorable contingencies in a real estate deal by leveraging market insights and professional expertise.
About the Author: Bill Gassett, a nationally recognized leader in his field, provided information on what contingencies are in real estate. He is an expert in mortgages, financing, moving, home improvement, and general real estate.
Learn more about Bill Gassett and the publications in which he has been featured. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of Metrowest towns for the last 38+ years.
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