What do Contingencies Mean in a Real Estate Contract?
When you are buying or selling a house, many contingencies can be written in the contract. What are they and what do contingencies mean? Let’s take a look at the five most common.
- Financing. Financing contingencies are the most common type of contingency. It is also the one that in almost all cases, does not get removed until the actual closing takes place, everyone has signed and the property changes ownership. It means that the lender or mortgage company has to fully approve and underwrite the loan and that if the loan is not approved for any reason, the Buyer can terminate the contract and receive their earnest/trust money back unless the contract accounts for it differently.
- Inspection. I always advise my Buyers to have the home inspected. Not only a general home inspection but if anything comes up on the inspection that may need to be evaluated further, specific contractors or professionals can also inspect those items. Radon, mold, and pest inspections can also be beneficial and can be part of the inspection contingency. Raw land may require other types of inspections and these are included as well. If the Buyer is not satisfied, for any reason, either with the findings, or the negotiations associated with the inspections, this contingency gives them a way out of buying the property.
- Appraisal. Appraisal contingencies keep buyers from overpaying for the property. Most contracts with appraisal contingencies in them allow the Buyer to terminate the agreement if the property does not appraise for at least the agreed to purchase price in the contract. As we discussed previously, the parties can negotiate if they want to move forward with executing the remainder of the contract but it does give the Buyer the right to walk away if they so choose.
- Sale of Home. This contingency can be used if a Buyer has another house they need or would like to sell prior to closing on a new one. Not all Sellers like to accept a home sale contingency – especially if the market is hot where they are but the market where the Buyer’s property is, isn’t. The contingency can be used if the Buyer’s property is currently on the market, is not currently on the market, or is already under contract, just waiting to close. Sellers should ask questions and perhaps make certain requirements of the Buyer if they choose to accept this type of contingency.
- Spousal approval. In a hot real estate market, it is necessary to move quickly in making an offer. If there is more than one Buyer but only one can make it to see the property, this contingency can be used. Typically, a Seller will require that the other Buyer see the property within a very short timeframe if they decide to accept this contingency at all. We see it used mostly when the Buyer is moving from out of state and only one Buyer is able to make the initial house hunting trip. In this scenario, the other Buyer would likely schedule time to attend the home inspection and see the property at that time. If you are the Buyer, especially if you are coming from out of state, you want to be almost 100% certain the other Buyer is going to approve before you start incurring expenses that could be involved in using this type of contingency.
Contingencies are widely used but not every contract includes them and not every real estate agent knows how to use them. Be careful that you are evaluating all options and understand the implications prior to writing or accepting contingency contracts.
Michelle Froedge is a residential Realtor and Principal Broker in the Greater Nashville and Williamson County areas of Tennessee. Wife to Robert, “Mom” to Tyler and Livvie, Auntie to Zelamie, she is a vegetarian and sings in her spare time. Michelle has lived in Nashville and Franklin since 1997 and has been selling homes since 2004.