Real Estate Financing Contingency

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 What Is Real Estate and Property Law?

Although the exact definition of property differs by state, in general, the legal definition of property is “anything that is owned by a person or entity.” Importantly, property can be a tangible or intangible object, or in some cases even an idea, that is owned by someone. Ownership of a piece of property gives the property owner the right to possess and use the property, as well as the right to exclude any others from the right to possess and use the property in question.

Property laws are the set of laws that govern the rights of property owners. Property law can generally be divided into three categories:

  • Real Property: Real property refers to fixed property and can also be called immovable property. Real property is any interest in land, including anything permanently affixed to the land in question.
    • Examples of real property include buildings, crops, fences, land, and machinery.
    • Real property can further be broken down into residential and commercial real estate.
      • Residential real estate refers to an area that has been developed for people to live in that cannot be used for commercial or industrial purposes, such as single-family homes, apartment complexes, and duplex homes.
      • Commercial real estate is property that is to be solely utilized for business purposes, such as gas stations, strip malls, hotels, and restaurants;
  • Personal Property: Personal property is any interest in anything other than real property.
    • Personal property may be either tangible or intangible.
      • Tangible property is personal property that may be physically handled, including vehicles, money, furniture, clothing, and books.
      • Intangible personal property is property that cannot be physically handled, such as stocks, bonds, trust fund accounts, etc.; and
  • Intellectual Property: Intellectual property, or “IP,” is a broad term that refers to property ownership rights involving an invention, creation, discovery, innovation, improvement, symbol, or design used in commerce.

As can be seen, there are numerous property rights and laws that fall under the umbrella of property laws. Once again, real estate laws may either involve residential or commercial real estate. Commercial real estate law is the set of laws under the umbrella of property law that regulate the sale and transfer of properties for business use.

On the other hand, residential real estate law is the set of laws under the umbrella of property law that regulate the sale and transfer of properties for residential use. Importantly, the exact laws concerning both residential and commercial real estate and the buying and leasing of such properties will vary from state to state.

What Is a Real Estate Contingency?

Contingencies refer to conditions that must be met in order for closing on a real estate property to occur. As such, a real estate contingency clause is a clause that defines the conditions and/or actions that must be met by both parties in order for a real estate purchase agreement to become legally binding.

Thus, if a contingency appears in a real estate purchase agreement or in the listing of the property, then either party can walk away from the deal without penalty if the specific contingency conditions are not met. In other words, a real estate contingency acts as a sort of escape plan if the specified contingencies aren’t met.

In most real estate contracts, there is a period of time between signing the contract and the actual closing of the sale, which is known as escrow. During escrow, most, if not all, contingencies are expected to be fulfilled. Then, if the contingencies are not met by the final closing date, then either party has the right to cancel the purchase contract without facing any sort of penalty.

For example, in a home sales transaction, an inspection contingency is one such real estate contingency included in a home or residential property sale contract wherein a closing cannot occur until the property has undergone a thorough and detailed inspection conducted by a neutral home inspector.

Many other real estate contingencies may be present in a real estate contract, such as financing contingencies. For instance, if a real estate buyer is having issues securing a mortgage for the property in question, the contract may be broken with no penalties to either the buyer or the seller if a financing contingency is present. In other words, a breach of a real estate contract will not be considered to have occurred.

What Are Financing Contingencies?

Financing contingencies are specific real estate contingencies that require a buyer to secure a mortgage or other suitable amount of financing before a real estate transaction can be completed. In most cases, the suitable amount of financing will be in the form of a loan, which is typically a mortgage.

A financing contingency is often requested by a seller in a real estate transaction in order to reassure a seller in cases where a loan falls through at the last minute before the real estate transaction has been completed.

This is because if a loan falls through at the last minute, then the seller may be put at a disadvantage as they are prevented from selling the property to another person in a timely manner while the transaction is under contract.

Further, the real estate market may change during the period of time in which the buyer secures other financing. As such, financing contingencies are often included in a real estate contract in order to help ensure that buyers are able to afford their initial payments and that they will continue to be financially responsible.

What Are Some Common Examples of Real Estate Contingencies?

As mentioned above, there are numerous different real estate contingencies that may appear in a residential or commercial real estate contract. Examples of common real estate contingencies include, but are not limited to:

  • Financial contingencies, where real estate sales contracts are contingent upon the buyer securing suitable financing, such as a mortgage loan;
  • Inspection contingencies, where the real estate contract is contingent upon the buyer having the right to have a neutral inspector evaluate the property for any potential defects, zoning issues, or other problems;
  • Renovation contingencies, where the real estate contract is contingent upon the property being renovated to the satisfaction of the buyer;
  • Insurance contingencies, where the real estate contract is contingent upon the approval of an insurance policy, such as the buyer not wanting to close on a property if they were unable to get homeowner’s insurance for any reason;
  • Closing date contingencies, which are generally utilized by the seller to ensure that they can back out of the purchase if the buyer cannot fund the deal by a certain date;
  • A contingency based on the sale of previous property, which is a contingency that states that the purchase of a new home is contingent upon the closing on a sale of another home.

It is important to note that the law allows both buyers and sellers to propose nearly any type of contingency during the negotiation process of a real estate purchase agreement. However, this does not mean that the other party is under any obligation to actually accept the proposed contingency. Instead, they may just back out of the real estate transaction before entering into a real estate contract.

Are There Any Alternatives to Financing Contingencies?

In short, yes, there are many alternatives to financing contingencies. One of the most common alternatives to financing contingencies is accepting only cash offers on the piece of real estate. However, cash offers are not always realistic as most buyers do not have the cash available on hand to purchase a piece of real estate.

Another alternative to financing contingencies is to have the buyer have a pre-qualification or pre-approval document from their lender that indicates they are qualified to make the purchase. In this case, however, there is still a danger that the buyer may not be approved for some reason at the last minute.

What if a Financing Contingency Is Not Fulfilled?

As mentioned above, if either party fails to meet a contingency present in a real estate contract, then either party may walk away from the contract. Further, depending on the wording of the real estate contract, the failure to meet a financing contingency may result in the party that fails to meet their burden being sued for a breach of contract. Then, if the other party is able to prove that the party breached their duties under the contract, they will be able to seek a damages award.

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

Before agreeing to any sort of real estate contract, it is important to consult with an experienced mortgage lawyer. An experienced mortgage lawyer can ensure you are aware of your legal rights and that the contingency is not violating those rights.

Additionally, should a breach of contract occur, an attorney can inform you of your available legal defenses or help you pursue a damages award. Finally, an attorney can also represent you in court, as necessary.

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