There are no guarantees in the real estate market. The risk involved in real estate transactions makes the parties involved look for ways to protect themselves from the potential risks that come along with these deals. These are known as contingencies. In any way you want to look at it, a contingency is a possibility that is conditional on something that is uncertain. In real estate, this means that certain conditions have to be met before the deal can go through.
A home sale contingency allows a party (typically the buyer) to back out of a legally binding agreement without any financial consequences.
How Does a Contingent Offer Work?
A person wishing to buy a house may put down a deposit which shows the seller that they are serious about buying the house. This deposit which is known as earnest money will be forfeited if the buyer backs out of the deal. To protect themselves from this financial loss, the buyer may opt for buying a house on contingency. This means that if the conditions that are specified in the contingent sale, are not met, they may back out of the deal and have the earnest money returned to them.
If the seller is okay with accepting the contingent offer, they usually have two options.
- The seller will take their house off the market, hoping that the conditions specified in the contingency are met.
- The seller can add a “kick-out” clause into the contract that will allow him/her to keep the house on the market to see if a better offer comes along. If such an offer comes along, the seller has to give the first buyer a chance to purchase the property within a specific period of time.
There are several things someone buying a house on contingency might wish to add to a real estate contract.
What is a Home sale contingency?
A home sale contingency is a clause that is inserted in contracts for sales of properties that protect the interest of the buyer in the transaction. A home sale contingency typically favors the buyers and presents some level of risk to the sellers of the properties.
A home sale contingency is made by a buyer who wishes to finance the purchase of a house by the sale of his/her own house. When a home sale contingency is added to real estate contracts, it means that the deal can only go through if the buyer is able to sell his/her own house within the time period specified in the contingency agreement and the seller can’t sell the house to another ready buyer unless the contingency is removed by the previous buyer.
There are two categories of home sale contingencies, namely the sale and settlement contingency, and the settlement contingency.
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The sale and settlement contingency
This type of home contingency is used if the buyer doesn’t have an offer on ground. This contingency allows the seller to market the house to other buyers and field offers. If the seller wishes to accept other offers, the buyer will have to make good on the agreement within 2 days. The contract becomes terminated if the buyer doesn’t keep up their end of the bargain within the specified period. This means that they can get back their earnest money.
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The settlement contingency
This is used when there is already an offer for the buyer’s house which has been accepted and once the deal is closed, the buyer can go ahead with the purchase of the new house. However, if the deal falls through the contract is terminated and the buyer can have their earnest money back.
This contingency can definitely protect buyers, however, it first has to be accepted by the seller and this is even more difficult if you’re in a seller’s market where the sellers have the bargaining power.
Home inspection contingency
A home inspection is part of the process of purchasing a house. This can help the potential buyer uncover hidden faults that may result in future problems for them. If a buyer has a home inspection contingency in the contract, it allows the buyer to make sure that the seller takes care of whatever repairs that may be required or negotiate a lower price. If an agreement can’t be reached between both parties, the buyer can back out without losing money.
Home appraisal contingency
This clause allows the buyers to back out of their contract if the value of the property after the appraisal is less than the price which has been agreed upon by the buyer and seller. Before agreeing to help you finance your purchase, lenders will make sure the property is appraised and ascertain the value of the house you want to purchase. If the appraisal value is less than the price you’ve agreed upon with the seller, you will have to find a way to come up with the balance because lenders are unlikely to give you more than the house is worth.
Of course, you, as the buyer can avoid this if you have an appraisal contingency that allows you to back out of the contract.
Seller contingency clauses
The already discussed home contingencies favor mostly the buyer. If you’re a seller reading this, you are probably wondering what seller contingency is out there for your benefit. There aren’t many contingencies that protect the seller so most sellers just don’t accept an agreement with a buyer that has too many contingencies.
A seller contingency would allow the seller to also back out of a deal if some conditions are not met. A seller contingency clause might make the house less attractive to buyers but this may not be an issue if it is in a seller’s market.
A good example of a seller contingency is adding a kick-out clause to a home sale contingency which essentially allows the seller to “kick out” the buyer if a better offer comes. This protects the seller in the event that they get a better offer or if the buyer is unable to sell their own house in due time.
Another seller contingency clause can be added if the seller wishes to buy another house of which the purchase is dependent on the sale of the current house. So the home sale contingency can favor the seller.
In many situations, there are many uncertainties that as a buyer, you will want to protect yourself from. This makes the use of contingencies a great way to protect yourself from losing money if you choose to back out of the deal. Seller contingencies, on the other hand, help sellers be better prepared for those deals that just don’t work out.
Remember: is always a good idea to seek the counsel of your real estate agent as a buyer or seller thinking about accepting a contract that includes contingencies.