A contingency in a home purchase contract has the possibility of wrecking the sale of your home. You may be asking yourself “what exactly is a contingency in a home purchase contract?”  Simply put, a contingency clause defines a condition or action that must be met first in order for a real estate purchase agreement to become binding.

Thus, when you see a contingency in a real estate purchase agreement or in the property listing, this usually means that there is an accepted offer on the property, but there are still steps that need to be taken before the contract becomes binding on both parties.

Contingencies may operate much like escape hatches, allowing the buyer or seller to walk away from the deal if the contingencies aren’t met. For example, if the buyer is having issues securing a mortgage for the property or other financing problems, then the contract may be broken with no penalties to the buyer or seller.

In most real estate contracts, there is a time period in between the signing of the contract and the actual closing of the sale. During this period of time, also known as escrow, most if not all contingencies are expected to be fulfilled. If all contingencies are not met by the final closing date, then either party may have a right to cancel the purchase contract without penalty.

Do not be scared if you see a contingency in your real estate purchase agreement, as contingencies may be beneficial to both buyer and seller alike.

What are Some Common Examples of Real Estate Contingencies?

It is common for a number of contingencies to be present in a real estate purchase agreement. Examples of contingencies that commonly occur in a real estate contract include:

  • Insurance Approval: Often time a buyer and lender will request an insurance approval contingency in the real estate purchase contract. A buyer would not want to close on a home, nor would a lender, if the buyer was unable to get homeowner insurance for some reason. 
    • Typically, the buyer will immediately apply for insurance to meet deadlines for a refund of earnest money if the home can’t be insured for some reason, such as past claims for mold.
  • Financing or Mortgage Approval: This is one of the most common contingencies in real estate. Typically, real estate sales contracts are often contingent upon the buyer being able to secure financing such as a mortgage loan, with which they will purchase the property.
  • Closing Date: Sometimes the real estate sale is contingent upon the sale closing before a specified date. This contingency is typically utilized by the seller in order to ensure that if the buyer is not able to fund a deal by a certain date, then the seller can back out of the purchase. 
    • This allows the seller to field other offers that are waiting or the seller may chose to extend the closing date in the contract.
  • Inspection: Most real estate purchase contracts provide the buyer the right to have a building inspector evaluate the property for any potential problems, defects, or zoning violations. In foreclosure sales, the deal may be contingent upon the buyer accepting the property “as is.”
  • Improvements: This is an agreement regarding the ability to make improvements or renovations on the property. Typically, more common in commercial properties.
  • Sale of Previous Property: As a buyer, if you already own a home and are expecting to use the proceeds from its sale to help purchase a new home, you may want to insert a condition that the purchase of the new home is contingent on the closing on a sale of the older property. 
    • However, A seller might not accept the buyer’s offer if it includes this contingency if he has others coming in.
  • Appraisal Contingency: Sometimes a real estate sale is contingent upon an appraisal to ensure that the property is worth the amount of the selling price. 
    • Should the appraisal reveal a price lower than the selling price, there will likely be further negotiation to see if the seller will lower the price. If not, the real estate purchase agreement may be voided.
  • Satisfactory Walk-Through Contingency: This is a contingency requested by the buyer to cover if during a final walk-through of the property the day before closing, the property had suffered damages since the contract was entered into. 
    • Examples of such damages are missing or non-working light fixtures, missing appliances, or damages to the door or windows.
  • Other Contingencies: The law allows for either the buyer or seller to propose almost any type of contingency in the negotiation of a real estate purchase agreement. However, this does not mean that the buyer or seller will accept the contingency.

As can be seen, contingencies are very common and normal in real estate transactions. However,  some contingencies proposed by the buyer or seller may sometimes cause problems and hinder the selling process.

Do I Need a Lawyer for Help with Real Estate Contract Contingencies?

Buying property is a significant financial investment. Before signing any purchase agreement, it may be in your best interest to consult an experienced real estate attorney to safeguard your investment.

An experienced and well qualified real estate lawyer can help you identify important conditions to include in the purchase agreement and help ensure that the conditions are properly fulfilled. Additionally, if a dispute arises, a real estate attorney can maintain a record of the purchasing process and represent your interests in court.