Real Estate Contingency in Texas

A real estate contingency is a provision in a real estate contract that allows a buyer or seller to walk away from the deal without becoming liable for breach of the contract or losing their earnest money, if certain conditions are not met by a specified deadline.

A real estate contingency provision defines the conditions that must be met or actions that must be taken before the real estate purchase agreement becomes valid and is legally binding.

If there is a contingency in a real estate purchase agreement, it generally means that there is an offer to purchase on the property that the seller has accepted. However, there are still steps to be taken or events that must take place before the contract becomes binding on both of the parties involved.

There are two types of real estate contract contingencies. One is known as the “hard contingency,” which requires one of the parties to sign off to indicate that the contingent event or condition has been met. The other is known as a “soft contingency.” A soft contingency expires after a certain date has passed.

Experts advise that a well-drafted contingency should state exactly how a party is to notify the other party that the contract must be cancelled because a contingency has failed. This is something a person might want to discuss with a Texas lawyer.

Contingencies may act as a sort of escape clause. They allow either the buyer or seller to walk away from the transaction if the specified contingencies are not met. An example of this would be making a purchase contingent on the buyer securing an acceptable mortgage to finance the purchase. The sale is not final if the buyer cannot get a mortgage loan and there would be no penalty for breach of contract on the part of either party.

Real estate contingencies protect a buyer from losing the earnest money they paid if they have good reason not to conclude a real estate purchase transaction. Most real estate transactions involve contingencies. Often, contingencies work to the advantage of the buyer. On the other hand, in markets in which sellers are likely to receive multiple offers for a property, buyers might waive all contingencies to give their offer a competitive edge with the seller.

In most real estate contracts, there is a period of time between the signing of the contract and the formal closing of the sale. This period of time is known as escrow. During escrow, most, if not all, contingencies should be resolved.

If those contingencies are not resolved by the final closing date, either party has the right to cancel the purchase contract without penalty. Contingencies can be beneficial for either party, depending on the circumstances and the contingency.

A legal consultation in Texas with a Texas lawyer would help a person understand the role of contingencies in real estate sales contracts and how they can serve the interests of a buyer or seller of property.

What Are Some Common Examples of Real Estate Contingencies in Texas?

• Mortgage Approval: Generally, residential real estate sales contracts are contingent on the buyer securing a mortgage loan to finance the purchase. One common contingency provision states that the sale is contingent on the buyer obtaining a mortgage loan on the terms and conditions that the buyer needs to obtain in order to afford the purchase. So, in this regard, it might specify an interest rate, a term of years, and a principal amount.
• Inspector’s Report: Most real estate contracts specify that the buyer has the right to have a building inspector evaluate the property for any potential defects, zoning issues, or other problems. In terms of a foreclosure sale, the deal could be contingent upon the buyer accepting the property “as is.”
• Appraisal: A real estate sale could be contingent upon the buyer receiving an appraisal that supports the purchase price of the property and their mortgage financing. If the appraisal reports a value that is lower than the selling price, the buyer and seller might negotiate in order to see if they can agree on a lower sales price. The real estate purchase agreement could be voided if the buyer and seller are not able to agree on a modified sales price.
• Title Contingency: A title contingency is standard in real estate purchase and sale contracts. It provides that the seller must own the title to the property free and clear in order to transfer it to the buyer. A buyer should obtain and review a title report with their agent in order to discover any outstanding liens or encumbrances on title. A title contingency would have to be resolved prior to closing. A lien or encumbrance would have to be paid off at closing from the seller’s equity in order for the transaction to be concluded.
• Renovation and Improvements: One type of contingency is a provision that allows the buyer to determine that the property can be renovated to their satisfaction. Such contingencies are more common in commercial real estate transactions than in those for residential real estate. Often, a commercial tenant wants to modify a commercial property to serve the particular uses they plan to make of it.
• Homeowners Insurance Contingency: A person must have homeowners insurance in order to get a mortgage loan. Even if they do not finance their purchases with a loan, they want to have homeowners insurance. The problem is that increasingly, this insurance may cost much more than a buyer expects because of such risks as location in a fire or flood zone or the presence of mold.
  • A buyer can protect against this by making the purchase contingent upon their ability to obtain affordable insurance. This is known as a “satisfactory Comprehensive Loss Underwriting Exchange” (CLUE) report. A buyer’s inability to obtain affordable insurance allows them to back out of the purchase contract and get a return of their earnest money.

What Are the Common Contract Contingency Issues a Client May Experience in Texas?

Contingencies exist because they allow the parties to reduce or eliminate potential risks that are involved in modern real estate transactions. Most buyers need to finance their purchases with mortgage loans and want to know that they can obtain an acceptable loan before they are able to complete the transaction. They also want to know that the condition of the real estate justifies the price being paid for it. For this reason, they have an appraisal condition in the contract.

A home inspection contingency essentially gives the buyer of real property a reason not to go forward with a transaction if the inspection of the property is not satisfactory and reveals defects that would be too costly to fix.

Typically, a minor issue revealed by a home inspection would not give a buyer a valid reason to back out of the contract. However, major issues such as foundation cracks, outdated electrical wiring, or mold infestation would likely allow the buyer to back out of the contract. Legal disputes often develop in connection with home inspection reports regarding whether an issue identified is minor or major.

Do I Need an Attorney for Help With Real Estate Contract Contingencies?

Before signing any property purchase agreement, whether for residential or commercial real estate, you should consult with a skilled and knowledgeable Texas contract attorney. An experienced contract attorney can review a contract and all of its contingencies in order to determine whether the terms are legally valid. They also review the contract to ensure that your interests are protected.

Having an attorney draft and negotiate your real estate contract, whether you are a buyer or a seller, is an even better way to safeguard your investment, as property purchases are costly and represent a major investment for most buyers.

An attorney can advise you about the contingencies you should include in your contract, and ensure that those conditions are properly written so they function as needed. That way, contingencies should not lead to expensive disputes but rather to a smooth and trustworthy transaction.