What is a contingency?
When it comes to real estate, a contingency is a clause in the purchase agreement that details actions and/or requirements to be met before the contract can become legally binding. The buyer and seller have to agree to the terms of all contingencies and sign off on them before the contract is legitimate and can be held up in a court of law.
It’s essentially a safeguard, allowing a “way out” for both parties should one of them (or both in rare cases) fail to meet the specified, agreed-upon conditions.
Some common examples of contingencies include:
- Appraisal contingency.
- Inspection contingency.
- Funding contingency.
- Repairs contingency.
- Mortgage contingency.
- Title contingency.
- Home sale contingency.
- Home insurance contingency.
The appraisal contingency is a significant and common contingency because if a property does not appraise for its expected value or what the sellers say it’s worth, the buyer’s financing is at risk of being canceled.
If this happens, the party can:
- Agree to cancel the contract.
- Appeal the appraisal.
- Renegotiate the purchase price.
- Any other compromise or negotiation the buyer and seller are up for.
Contingency case study
Roman and Ysa have fallen in love with Adrian’s house. They make an offer and are excited to move in. But, with the advice of their realtor, they put a home inspection contingency in their bid. They gave Adrian 10 days to get a professional inspection on the property to ensure the roof isn’t leaking; the electrical system is not faulty, etc.
The inspection came back with a whole slew of issues, from a leaky roof to clogged drains, dangerous lead levels in the paint, and an outdated HVAC system, to name a few. Adrian decided there was no way he could afford all of these upgrades and therefore, would not fix them to uphold his end of the deal with Ysa and Roman. The couple also knew they could not afford to bring the house up to code and did not want to live in dangerous conditions. So, the contract was terminated.
The bottom line
Contingencies are more minor agreements within the real estate contract to protect the buyer and seller. If the contingencies fail to be agreed upon by both parties, or one party fails to meet them, the contract will likely be terminated. There is a vast array of contingencies to choose from, including home insurance, title, mortgage, inspection, appraisal, and home sale contingencies. Just remember the more contingencies on your contract, the slower the purchase process will be and the higher the chances that something will not be met, causing the contract to potentially fall through. So, be reasonable while making sure you get what you want.