Whenever a buyer makes an offer that’s accepted by the seller, a contract will be drawn up that provides details about the sale of the home as well as a closing timetable. For instance, the contract will include the condition of the property as well as information about what is and isn’t included in the sale of the home. It’s also possible for contingencies to be placed in a real estate contract. A contingency contract is a type of contract that includes stipulations that will need to be met in order for the sale to be completed without issue.
The purpose of a home contingency is to protect the buyer and make sure that costly mistakes aren’t made with such a large investment. While the inclusion of contingencies can provide protection to investors, it’s also important to understand that these clauses can worsen the negotiating process and make it less likely that a deal will be made. It’s recommended that you don’t include too many contingencies that will only serve to overwhelm the seller. Since the current market in most areas throughout the U.S. is a seller’s market, negotiations must be handled by an experienced real estate agent who knows how to get you what you want without causing the seller to back out of the deal.
There are many different variations of contingencies that can be placed in contracts. The ones that you use when buying a home depend on the type of property you’re purchasing and which contingencies are most important to you. The five main contingencies that can be placed in a real estate contract include a financing contingency, a home inspection contingency, a home insurance contingency, a home sale contingency, and a title contingency.
When you’re searching for a home to buy, you’ve likely noticed that properties can be labeled with “pending” or “contingent”. When a home is listed as contingent, this means that the seller has accepted an offer on their home. However, certain criteria will need to be met before the sale can go through. As for pending, this indicates that the seller has officially accepted an offer but that the sale can fall through in the event that financing can’t be obtained or a major problem is found with the condition of the home. Unlike pending listings, a contingent listing is considered to be an active listing, which means that offers can still be made on the home. If the contingencies aren’t met, your backup offer could be accepted by the seller. This article offers a comprehensive overview of home contingencies.
Contingency Rules in Real Estate
Before a deal can be officially completed, a contingency contract requires that specific stipulations are met by the seller. Contingencies will be placed in a contract while negotiations are ongoing. In fact, contingencies are designed to foster negotiation and to bring about a better deal for both parties. However, some buyers make the mistake of not understanding what contingencies are and the important of them before entering the closing period. Learning about contingencies will better prepare you for the closing process and may help you obtain a deal that more effectively protects your investment.
First, it’s important to understand that contingency contracts are considered to be conditional. What this means is that the contract is only binding once certain tasks are completed. If these tasks aren’t finished by the time the deadline rolls around, the contract will likely fall apart. To better understand the conditional nature of contingencies, let’s take a look at car insurance. Even when you have insurance, the insurance company won’t provide payments unless damage has been done to your vehicle or the vehicle itself has been stolen. The money that you receive is contingent on theft or damage to your vehicle.
The contingencies that are placed in real estate contracts are also based on very specific events. It’s not enough to say that the home needs to be improved in order for the contract to be binding. Instead, the contingency should state that the HVAC system should be replaced or that leaky piping should be repaired before the sale can go through. A contingency should never be open to interpretation.
Keep in mind that any contingency you place in your contract should be attached to exact deadlines. No one involved with the sale of the home wants to wait months for the closing process to conclude, which is why deadlines are a must. The final guideline about contingencies is that the agreement needs to be binding. Every contingency that’s included in the contract should be clearly detailed and understood by both parties. It’s also essential that you put down in writing what will occur if these contingencies aren’t met.
5 Types of Contingencies
There are five separate types of contingencies that could be included in your contract. The contingencies that you include depend entirely on the types of protection you would like for your investment.
Financing Contingency
A financing contingency is a simple and straightforward contingency that’s included in most contracts. What this contingency states is that the offer is contingent based on the ability that the buyer has to obtain financing for the purchase of the home. This type of contingency will detail the terms and type of loan as well as the deadline for applying for the loan. If the buyer is unable to obtain financing by the set deadline, they can break the agreement without losing the earnest deposit that they provided when the offer was accepted. It’s because of this contingency that many sellers prefer buyers who can pay entirely with cash.
Home Inspection Contingency
A home inspection contingency is the most common contingency that’s placed in a real estate contract. A home inspection contingency is typically included as a part of the due diligence process, which ensures that an inspection can occur at some point within 1-2 weeks after an offer has been accepted. This inspection will tell you if the condition of the home is acceptable and matches your buying standards. Once an inspection has occurred, you’ll receive a detailed report that includes information about:
- Trees and vegetation
- Pests and termites
- Basement and foundation
- Electrical and plumbing systems
- Heating and air conditioning systems
- Encroachments and easements
- Mold, asbestos, radon, and methane gas
- Zoning and permits
- Sewer system
- Roof condition
- Soil stability
The inspection report will also give you a good idea of what repairs should be made to the home. You’ll have three options for what to do next. You can request a discount on the purchase price, get out of the deal that you’ve made, or ask that the seller complete certain repairs before the closing process has finished.
Home Insurance Contingency
A home insurance contingency will require that the buyer obtain home insurance before the sale can be completed. Home insurance is designed to protect the buyer from fires, property damage, and other issues that could occur in the home. Keep in mind that obtaining home insurance may be more difficult than you anticipate. Insurance companies are less likely to provide insurance in different areas of the country. For instance, it’s difficult for homeowners in Southern California to obtain fire insurance because of the large number of fires that can occur in this region. If you can’t secure home insurance by the deadline, the inclusion of this contingency means that you can back out of the initial deal without losing anything.
Home Sale Contingency
A home sale contingency is another common contingency that’s important for anyone who is trying to buy a new home while selling their current property. You don’t want to be in a situation where you buy a home only to find that selling your previous home is taking longer than you expected. A home sale contingency will allow you to back out of your offer if you’re unable to sell your current home.
Title Contingency
A title contingency is designed to protect the buyer in the event that problems with the title are unable to be resolved. When buying a home, your real estate agent should perform a title search on the home to obtain information about possible ownership issues or liens that have been placed on the property.
For instance, any home that was purchased with a mortgage loan will contain a mortgage lien on the title. However, other liens could be present that will need to be resolved before the sale of the property can go through. If an issue with the title can’t be resolved before the closing process is completed, having this contingency in the contract will allow you to get out of the deal without any consequences.
What To Be Aware of with Real Estate Contingency Contracts
Before you start adding contingencies to your real estate contract, there are several things that you should be aware of. For one, any contingency you place in the contract will give you a legal way to leave the contract without facing any consequences. However, the seller may believe these contingencies to be hurdles in getting through the closing process, which could make them less likely to sign the contract.
Keep in mind that there are some contingencies that won’t cause the seller to be less inclined to accept the contract, which include the home inspection contingency and financing contingency. Adding anything else may complicate the purchasing process, which is why it’s important that you speak with your real estate agent before going through with it.
While sellers are invariably going to find contingency contracts to be less appealing than contracts without contingencies, the contingencies that you place in your contract are essential towards giving you the protection you need to be confident in your investment. For instance, you don’t want the inspection to identify major issues with the structure of the home only to find that you’re unable to get out of the deal without losing your earnest money deposit. Contingencies are critical components of any real estate contract.