Contingencies in a Home Real Estate Purchase Contract

When a person makes an offer on a property, and that offer is accepted, typically the buyer and seller enter into a binding contract for the sale of the real estate. However, making an offer on a property is often done before a buyer has full knowledge about the property or is actually 100 percent confident that he will be going through with the purchase. In order to protect buyers and sellers, a number of different clauses are usually included in an offer to purchase or in a purchase/sale agreement. These clauses are called contingencies.

What are Contingencies?

Contingencies are contractual clauses that provide both a buyer and a seller with a way to get out of a real estate contract without being subject to a loss of escrow funds or other damage costs. Contingencies may be negotiated as part of a purchase/sale agreement, or may be included in a real estate offer, depending on the needs of buyers and sellers. There are some standard contingencies that are often included in real estate contracts, although the parties to the contract are also free to negotiate their own contingencies as well if they are able to get the other party’s approval.

Most contingencies in residential real estate transactions are in place to protect buyers. For instance, buyers may include a contingency clause that absolves them of their obligation to buy a property if they are unable to obtain a mortgage. For buyers (so-called a financing continguency), it is generally smart to include a specified rate as well. For instance, a buyer’s mortgage contingency clause may state that his offer to purchase is contingent on obtaining a mortgage at or below six percent.

Home Inspection as Contingency

Almost all buyers also make their offer contingent on an inspection of the house. This way, if there turns out to be major defects to the home, the buyer is not obligated to follow through with the transaction. When an inspection reveals problems, buyers may choose not to buy the house or they may choose to ask the seller to correct any defects that were found. However, if the clause allows the buyer to void their offer if the inspection identifies certain defects, then the buyer usually will be able to elect not to buy the property when these defects exist, even if the seller does make an offer to fix the problem.

Sale of current home

Another common contingency on a new home purchase for buyers is that they must sell their current home first in order to buy the new property. The contract can, for example, include a clause giving them 30, 60, or 90 days to sell their home. If the seller agrees, then the seller must wait for this period of time to see if the buyer actually sells the house; the seller cannot just accept another offer during the waiting period unless the contract between him and the buyer specifically allows her to do so. On the other hand, a seller may sometimes include a contingency clause allowing her to get out of the sales contract if she is unable to find a new home for purchase.

These are just some examples of contingency clauses that may or may not be included in residential real estate agreements. Like any contractual terms, clauses may be negotiated and a buyer or seller may refuse to agree to a contract if there is no agreement on what contingencies will be included. Both sides should be represented by an experienced attorney who can help make sure the offer and purchase/sale agreement contain all relevant contingency clauses necessary to provide protection.

Case Studies: Contingencies in a Home Real Estate Purchase Contract

Case Study 1: Financing Contingency

In this case, a buyer includes a financing contingency clause in the offer to purchase a property. The clause states that the buyer’s obligation to buy the property is contingent on obtaining a mortgage at or below six percent.

If the buyer is unable to secure a mortgage within the specified rate, they have the option to back out of the contract without facing any financial losses.

Case Study 2: Home Inspection Contingency

A buyer makes an offer on a house, including a home inspection contingency. After the inspection, significant defects are discovered in the property.

As per the contingency clause, the buyer is not obligated to proceed with the purchase. They can choose to negotiate with the seller for repairs or simply withdraw from the transaction.

Case Study 3: Sale of Current Home Contingency

In this scenario, a buyer includes a contingency clause stating that they must sell their current home before buying the new property. The contract specifies a specific timeframe, such as 30, 60, or 90 days, for the buyer to sell their home.

During this period, the seller must wait to see if the buyer successfully sells their property. The seller cannot accept another offer unless explicitly allowed in the contract. If the buyer fails to sell their home within the specified timeframe, the seller has the option to terminate the contract.