Contingencies – What do they mean?
A real estate contract can have many different contingencies. Dictionary.com defines a contingency as “dependence on chance or on the fulfillment of a condition.“ Typically, there is trust money (aka earnest money) given as a deposit in a contract. Contingencies can be a way to protect that money if there is a valid reason that the Buyer cannot perform. Both Buyers and Sellers can use contingencies for their protection. Here are 5 common contingencies and what they mean.
- Financial contingency: A financial contingency is commonly used when the Buyer is getting a loan to purchase the property. This contingency means that if the Buyer’s financing falls through and they can’t get the loan, they are not bound by the contract. In most cases, the Buyer’s trust money would be returned.
- Appraisal: An appraisal can be used whether or not the Buyer is getting a loan. If there is a lender involved, they will require an appraisal be done on the property to ensure the property’s value and to protect their investment. A cash buyer may want an appraisal to ensure they are not paying more than what the property is valued at, especially if it is priced high for the market or is a tough property to find comparisons for. When written properly, an appraisal contingency will also require the Seller to release any trust money the Buyer paid per the contract.
- Inspection: Most Buyers will opt to have a property inspected before they purchase it. An inspection contingency allows the Buyer to be released from a contract if the inspection results are not satisfactory or if the Buyer and Seller cannot come to agreement regarding repairs or concessions for repairs.
- Home Sale: A home sale contingency can be used if a Buyer needs to sell their current home before they can purchase a new property. In fast-moving markets, Sellers are not always willing to accept home sale contingencies because they will be, essentially, taking their house off the market while it is under contract and if the Buyer’s home doesn’t sell, they will have to start over. However, Sellers may be willing to accept this type of contingency if the Buyer agrees to a kick out clause. This would allow the Seller to continue to market the home and if another offer is made, the current Buyer would have a short period of time in which to remove the home sale contingency and continue with purchasing the property or if they can’t, the Seller can terminate the current contract and move forward with the new Buyer.
- Bank Approval: This contingency is used when a Seller is trying to sell their property as a short sale. This means the Seller is selling the property for less than what is owed to the lender or lenders. The bank (lender) will need to approve the contract price and do the necessary paperwork. If for some reason the bank does not approve the contract price and the Buyer does not agree to a higher price, the contract can be terminated and the Buyer would receive any trust money that was deposited.
As always, I recommend consulting with your Realtor or licensed agent when writing a contract and/or any contingencies. There can be many pitfalls when writing contracts and you need to be protected.
Michelle Froedge is a residential Realtor and Principal Broker in the Greater Nashville and Williamson County areas of Tennessee. “Mom” to four-legged fur babies, 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.