Real Estate Contract Contingencies: What to Expect – The Closing Curve

Real Estate Contract Contingencies: What to Expect

Rarely is a real estate contract written completely straightforward.

Most transactions involve some sort of contingencies.

A contingency is a clause in a real estate contract that says there are certain conditions that MUST be met by either the buyer or the seller in order to continue on to the next step.

If the contingencies are not met, there might be a breach in the contract, and the transaction could fail to close. Or, one or the other party may be released from the agreement.

There are several common contingencies that we see on contracts:

The first of these is the financing contingency. This means that the buyer needs to get a mortgage. Once the mortgage loan is secured, that contingency is removed from the contract. If the buyer can’t get financing, they can withdraw from the contract without being penalized.

For buyers, this one is important and sometimes causes anxiety. If they put forth an honest effort to get financing and it doesn’t work out, the buyer most likely will get their earnest money deposit back and be released from the contract.

Another contingency that is put into place to protect the buyer is a home inspection contingency.

If there is a home inspection ordered and the house does not pass due to factors like termite damage or faulty wiring, the buyer has the right to exit the contract and receive any deposits or earnest money back. If the issues can be corrected, the buyer can request these repairs. If the seller does not agree, the contingency cannot be removed and the contract is voided.

Another popular contingency is one that allows for the sale of the buyer’s current home. The buyer has a specified amount of time to sell his or her current home before buying a new one. The contract will be voided with no penalties if the current home does not sell. This protects the buyer from a situation where he or she would have to pay two mortgage loans at once.

If the seller accepts a contingency for the buyer to sell their home, they will sometimes add a kick-out clause. A contingency of this type protects the seller. If the seller receives a second offer on the home that is more attractive than the first, he or she will be able to accept the new contract without facing a penalty. If a kick-out clause is added, and a buyer comes along with a better offer, the buyer under contract will have 48-72 hours (depending on the agreement) to decide if they can proceed without the contingency.

Another common contingency asks for a 24-hour attorney review. Once both parties have signed the contract, the attorney for the buyer will be given 24 hours to approve the contract. The attorney gives the buyer peace of mind that the contract is in legal order.

It is important to remember that contingencies should be reasonable requests.

But there is no limit to what kind of contingencies a buyer (or seller) can ask for. Agents in my network have seen contingencies such as:

  • The Sale is contingent on the buyer selling her house to a buyer that was contingent on their house selling which was contingent on an appraisal. (Sheesh!)
  • The Sale was contingent on sellers wife getting married in the next week.
  • The sales is contingent on the buyer selling their RV.
  • The sale is contingent upon the Buyer’s new car, on order, fits in the garage once it arrives.
  • Sale contingent upon the Ability to keep 10 goats on subject property.
  • A Feng Shui inspection
  • Buyers offer conditional upon viewing the property in 3 days and if he likes it. (This is common in second home areas where people see properties online and want to travel down to preview.)

It’s important to note: Too many contingencies can be a turnoff for sellers.

You do not want to lose a seller or a buyer because of unreasonable contingencies. Work closely with your agent and be fair. If it’s a hot neighborhood or a super competitive market, the fewer contingencies the better.

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