CONTINGENCY REAL ESTATE: Common Contingencies Every Buyer or Seller Should Know

contingency real estate
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Buyers will likely do everything to purchase a worthwhile property but, no one wants to buy a house above its value. Neither does anyone wants to lose his earnest deposit or spend a lump sum fixing issues on a property they purchased. This is why they get lawyers to add a contingency in almost every real estate contract offer. The lawyer, according to the buyer’s demands writes a compelling contingency offer that should attract a seller in a real estate deal. However, not every offer will be accepted by a seller. This guide explores everything you need to know as a buyer, seller, lawyer, or real estate agent in contingency offers.

Contingency Real Estate Offer

In the real estate business deals, no one wants to lose out. Not the buyer who wants to sell the property at a profitable rate, and not the seller who offers his property for sale. To ensure that interests are effectively protected, contingencies are introduced. Generally, most contracts have provisions for contingencies. In real estate, when a seller put up a house for sale, interested buyers present their proposals which come as a contingency offer. The buyer having assessed the offer decide whether to accept it or not. If the seller accepts the offer, he can negotiate the offer with the buyer till both agree. Once an agreement is reached, both become bound to the contingency offer in their real estate contract.

A contingency is an escape route that permits either party to breach a contract without penalty. This means a buyer or seller can decide to walk away. However, the basis must be that his conditions were not met. Also, the signing of the contract and the actual closing of the sale are usually separated by a certain amount of time in most real estate contracts. This is known as escrow. Many contingencies are anticipated to be met during escrow. Either party is free to cancel the purchase contract if not satisfied. But it must be because some or any of the above conditions are not met by the final closing date. 

What is Contingency in Real Estate?

A contingency is a clause in real estate contracts that stipulates that specific conditions must be met by either the buyer or the seller before the next stage in a purchase contract proceeds. These conditions are primarily to protect interests. However, both parties must understand the provisions within the context before agreeing to the contracts. This is because, when conditions are not met, the buyer or seller is free to walk away from the deal. Also, both parties have to agree to the terms in the contract before it becomes a binding contract. With contingencies in a purchase contract, the interest of seller and buyer is safeguarded. Moreover, either party can easily walk out on the deal if it does not fulfill the conditions. When the conditions are met, it leads to a contingent listing. However, a contingent offer must be active before its listing. 

What is Active Contingency?

Active contingency means an offer has been made by the buyer to the seller but the conditions are still yet to be met. In this state, the house has a pending sales status in the market.  A pending sales status in the market means other interested buyers still have chances of presenting their offers if the present conditions are not met. In an active contingency, some of the conditions may include home inspection, house appraisals, and so on.

For instance, a buyer Mr. Williams wants to buy Mrs. Wilmort’s property. He asked his lawyer to add a mortgage contingency to the real estate offer. The contract may give Mr. Williams a 4 weeks time frame to get a 30-year conventional loan for 80% of the purchase at a fair interest rate. If Mr. Williams gets the loan, then the sales process will continue. However, if he did not get the loan, then the deal will be canceled. If the latter happens, it means Mr. Wiliams will get back his earnest deposit.

What is Contingency Listing?

A contingent listing simply means a house is currently listed for sale but the sale agreement is yet to close. Although an offer has been made and accepted, several requirements, or contingencies, must be completed before the house may be sold for its full asking price.

Common Contingencies in Real Estate

Lawyers and real estate agents draft different types of contingency contracts for buyers. Sometimes, the contract is based on the advice of the lawyer or realtor. While at other times, it is solely dependent on the contingency a buyer wants in his offer. The following are the most common contingencies in real estate.

#1. Home Sale Contingency 

Home sale contingency is the first clause we will look at. Buyers get lawyers to include this in a real estate offer as a contingency because of funding. Buyers who want to purchase a property with the home sale contingency are people who have another property up for sale. Generally, they use the proceeds from the sales of selling their existing house to purchase a new house. So in using the home sale contingency in a real estate contract, the buyer indicates he has a house for sale and requests a stipulated time frame to sell his house. It simply means the house in question can only be purchased by the buyer if and when their current property has been sold and the proceeds have been settled. Either party can pull out of the deal if the sale did not take place as planned.  

How does the Home Sale Contingency Work?

The home sale contingency protects buyers who require the funds from the sale of their existing house to be able to afford a new one. The buyer already has a house listed for sale. He may have also received an offer before submitting his offer but he is yet to conclude the sale process on his house. If the sale did not hold within the time frame, then the buyer can still get back his earnest money. While the seller is free to accept another offer on the house.

Types of Home Sales Contingency

There are two types of home sale contingency

  #1. Sales and Settlement

The sales and settlement means the buyer has a house but is yet to receive an offer

 #2. Settlement

The settlement sale contingency means the buyer has a house, and has received an offer but is yet to close the deal.

#2. Financing Contingency

Whenever you hear about mortgage, funding, or financing contingency, they all refer to the same thing. A buyer will instruct his lawyer to include this in his real estate contingency offer if he intends to fund his purchase with a mortgage. With this in place, the buyer has time to apply for and acquire financing before finalizing the purchase of the house. However, when a buyer is unable to acquire financing from a bank, a broker, or another sort of lender, they have the option of canceling their contract and reclaiming their earnest money.

How Does the Mortgage Contingency Work?

When a buyer includes this in his offer, he is allowed a certain number of days to get finance under the terms of a financing contingency. Buyers need to qualify and then be pre-approved for a loan. Therefore it is advisable to have been preapproved for a loan before including this in your offer. 

There are times when a buyer may be unable to secure the loan within the date specified. In this situation, he will get back his earnest deposits and terminate the agreement. He can also request an extension with the seller if he wants to source finance else. 

#3. Appraisal Contingency

The appraisal contingency in real estate protects buyers from buying a property far more than it is worth.  

How Does Appraisal Contingency work?

The buyer will specify a minimum amount that the property will be sold in his offer and set out to appraise the property. If the property is below the minimum amount, the buyer can collect back his earnest money and walk away.

However, an appraisal contingency may include clauses that allow buyers to proceed with their purchase even if it falls below the specified amount.  The lawyer or realtor needs to include it in the real estate contingency contract in such situations. Sellers can also decide to reduce the initial price of the house to meet up to the appraisal price. Finally, the buyer must inform the seller of his decision to walk out on the deal before a specified time. 

#4. Inspection Contingency

The inspection contingency is also called the due diligence contingency in real estate. It is a clause that allocates a specific time frame to the buyer to inspect the property he wants to buy. The time frame differs but ranges from 5 to 10 days or more. A buyer must inspect the house he wants to buy to avoid unnecessary future expenses that would have been avoided. Sometimes there are issues in a house that the buyer will not specify. Such issues will only be reviewed by house inspection. 

How Does It work?

When buyers include this contingency in their contract, a duration of time to run the inspection is stipulated. During the inspection, the inspector looks out for things like a leaking roof, a defective electrical system, or any serious faults. It is very important to look out for mold and insect infections, or damage.  

After the inspection has been done, the buyer can get a lawyer to adjust the contracts based on the findings. Based on the findings, the buyer can decide to reduce the price of the offer. The result at times opens doors for renegotiations. 

Benefits Of Inspection Contingency House

  • Inspections can identify major, unexpected concerns with a property that may affect a buyer’s desire to acquire the property.
  • Having a house inspection clause in a sales contract gives purchasers the option of canceling the transaction or renegotiating the price.
  • Buyers can also demand the seller fix the repairs or reduce the price with the result of their findings

 #5. Title Contingency

The title contingency allows a buyer the right to conduct a title search and to submit any objections to the status of the seller’s property title, which must be cleared for the buyer to close sales.

#6. Homeowners Insurance Contingency

Lawyers include the homeowner insurance contingency in a real estate offer if the buyer desires to obtain insurance on the said property. When the buyer fails to get the insurance within the time frame, either party can decide to walk away from the deal.

Contingency Real Estate Lawyers

Lawyers or real estate agents are the people who draft a contingency contract for buyers. They also advise the buyer on the number of contingencies to include in the proposal. 

Benefits of Involving A Real Estate Lawyer in Contingency Offer

Anyone can complete a property sale or purchase process without consulting lawyers in a real estate contingency contract. However, this is not usually advisable. The following are the benefits of involving a lawyer in your contingency offer. 

  1. A lawyer will help determine the legal and fair terms within the contract by examining all of its clauses. 
  2. They ensure your interest is protected in the contract.
  3. When drafting a contract, a lawyer helps you decide what conditions should be included as a backup plan and then make sure that those contingencies are met.
  4. When any legal concerns arise with your contingency offer, the real estate lawyer will be right there to defend you.
  5. Since they protect your interest, they partner with you to ensure you win at all times.

Conclusion

Most real estate offer has contingencies, however, if the house in question is a hot chase, you can decide to be lenient with your offer. When that happens, you are sure going to beat any existing offer, however, make sure you involve your lawyer before taking such a risk.

FAQs On Contingency Real Estate

What are standard attorney contingency fees?

Consult with your state bar association or other licensing authority before agreeing to any contingent fee agreement to ensure that the sum does not exceed any limit set by the ethics committee of that body. However, a lawyer in the United States might expect to receive a contingency fee agreement in the range of 30% to 40% in most states. In certain cases, you may be able to get a cheaper charge, but in other cases, you may be forced to pay a larger fee.

Can a seller back out of a contingent offer?

A seller has the right to withdraw at any time if the conditions mentioned in the purchase agreement are not met. But if every condition were met, the seller may face a penalty for backing out of a deal. 

What is the difference between pending and contingent?

A seller of a home with a contingent status can still accept other offers because the property is theoretically still available for sale. However, if your status is listed as “Pending,” it signifies that the home is no longer available for viewing by other potential buyers.

Does every contingent offer in real estate turns to sale?

The average number of days to close a house sale is 46 days. Within this period, an offer with a home sale contingency may fall through, and a buyer with a mortgage contingency may also be unable to get funding. This simply means that not every contingency proposal turns into a sale.

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