Introduction
A real estate contingency is a condition that must be met before a real estate transaction can be completed. It allows the buyer or the seller to back out of the deal if certain predefined events do not occur. Real estate contingencies are very common in real estate purchase agreements and they benefit both the buyer and seller by allowing them to cancel the transaction if there are issues discovered during the closing process.
For buyers, contingencies provide protection and allow them to cancel and get their earnest money deposit back if the conditions are not met. Common real estate contingencies for buyers include securing financing, a satisfactory home inspection, and an appraisal at purchase price. For sellers, contingencies allow them to cancel if the buyer cannot obtain financing or close on time. Contingencies are meant to reduce risk for both parties and provide an “out” if problems arise.
Overall, real estate contingencies act as safety valves during the closing process. They allow buyers and sellers to proceed with confidence knowing they can cancel the deal if major issues appear. Defining contingencies upfront prevents misunderstandings down the road. If you want to learn more, read the following: Escrow Process When Selling a Home in Richmond, VA, Opening Escrow, Title Search and Title Insurance, Home Inspection and Repairs, and Importance of Appraisals.
Common Contingencies
Contingencies give buyers and sellers an “out” if certain predefined conditions are not met before closing on a home sale. They are very common in real estate purchase agreements. Some of the most common contingencies include:
Financing Contingency
The financing contingency is one of the most critical contingencies from the buyer’s perspective. This contingency allows the buyer to back out of the purchase agreement without penalty if they are unable to secure financing by the specified deadline, usually 30-45 days after signing the purchase agreement.
The buyer will work closely with their lender during this period to apply and get approved for a mortgage loan. The lender will appraise the home and evaluate the buyer’s ability to repay the loan. If the appraisal comes under the purchase price or the lender does not approve the loan, the buyer can exercise the financing contingency to cancel the contract. Sellers prefer buyers who are pre-approved for a mortgage and have a large down payment since they are less likely to have financing issues.
Inspection Contingencies
Many real estate purchase agreements are contingent on a home inspection being completed and the buyer being satisfied with the results. The buyer typically has an inspection done soon after the contract is signed so any issues with the home can be identified.
Common items inspected include:
- Structural issues such as cracks in walls or foundations
- Electrical systems
- Plumbing systems
- HVAC systems
- Roof or chimney issues
- Pest infestations
- Mold or water damage
If issues are found during the inspection, the buyer can request that the seller make repairs or adjust the price accordingly. The seller has the option to make the repairs or refuse. If the seller refuses, the buyer may be able to terminate the contract and get their earnest money deposit back if they are unsatisfied with the inspection results.
Home inspection contingencies protect the buyer by allowing them to thoroughly evaluate the condition of the home before finalizing the purchase. It prevents buyers from being stuck with unexpected repair costs shortly after moving in. Sellers may also benefit by having the chance to make repairs before the sale rather than negotiating a lower price.
Appraisal Contingencies
An appraisal contingency is an important protection for the buyer during real estate transactions. This contingency makes the sale contingent on the property appraising for at least the amount of the sale price.
The buyer usually pays for an appraisal to be completed by a licensed, third-party appraiser. The appraiser inspects the property and generates a professional opinion of its market value.
If the appraisal comes in below the agreed-upon sale price, this triggers the appraisal contingency. The buyer would then have the option to renegotiate the price lower. Alternatively, the seller may reduce the price or agree to make repairs to make up for the appraisal gap.
Appraisal contingencies help protect the buyer from overpaying and taking on more mortgage debt than the property is worth. Lenders also want to ensure the loan-to-value ratio aligns with the collateral. Without an appraisal contingency, the buyer would be obligated to complete the sale even if the appraisal shows a lower value.
Title Contingencies
A title contingency allows the buyer to cancel the purchase agreement if issues arise during the title search process. The title company will conduct a title search to ensure the seller has clean title to the property with no liens or other encumbrances.
Some common title contingencies include:
- Errors in public records – If errors are found in the public records about the property, such as an incorrect legal description, the buyer can cancel the contract until it’s resolved.
- Liens or judgments – If there are any outstanding loans, tax liens, mechanic’s liens, or other judgments against the property, the seller must clear these before closing. Otherwise, the buyer can terminate the deal.
- Easements or restrictions – If any easements or restrictions are discovered that negatively impact the property’s use, like a shared driveway easement, the buyer may opt out of the purchase.
- Boundary/survey disputes – If a new survey reveals encroachments from neighboring properties or other boundary issues, the buyer may cancel citing the title contingency.
- Undisclosed heirs – If any unknown heirs of the seller come forward with a claim to the property, the buyer can exit the deal until it’s resolved.
The title contingency provides the buyer an “out” if any issues arise jeopardizing clear title transfer. This protects the buyer from unknowingly purchasing a property with defects impacting ownership rights. Most purchase agreements include a title contingency giving the buyer power to terminate if problems come up.
Repair Contingencies
A repair contingency allows the buyer to inspect the property and request that the seller make repairs to the home before closing. The buyer will often hire a home inspector to thoroughly inspect the property and identify any issues or defects. The inspector will provide the buyer with a written report detailing any repairs that are recommended.
The buyer will then request in writing that the seller address specific repairs or issues found during the home inspection. For example, the buyer may ask the seller to replace an old roof, update faulty electrical wiring, repair a leaky pipe, etc. The seller can then decide to make the requested repairs at their own expense, decline making repairs, or negotiate a compromise on the repairs.
If the seller declines to address the repairs to the buyer’s satisfaction, the buyer has the right to terminate the contract and walk away. The repair contingency provides protection for the buyer against buying a home that requires expensive, unexpected repairs. It gives them the ability to inspect the home thoroughly and negotiate repairs from the seller, or cancel the sale if adequate repairs cannot be agreed upon.
Without a repair contingency, the buyer could be stuck purchasing a money pit filled with problems they only uncover after closing. The contingency period allows buyers to properly vet the condition of the home and ensure it meets their expectations before the sale is finalized. Most real estate contracts include repair contingencies to protect the interests of buyers.
Role of Closing Company
The closing company plays a critical role in ensuring all contingencies are met before the real estate transaction can be completed. As a neutral third party, the closing company reviews the purchase agreement and works closely with both the buyer and seller to confirm that any contingencies have either been satisfied or waived.
Some of the key responsibilities of the closing company include:
- Tracking deadlines for contingencies and following up with parties as needed. The purchase agreement will specify dates by which contingencies must be met.
- Reviewing inspection reports, appraisals, title commitments, and other documents to verify contingency requirements have been fulfilled.
- Facilitating any repairs or resolutions where the seller is responsible for meeting a contingency. This may involve holding repair escrows or disbursing funds upon completion.
- Obtaining lien releases, collecting funds from parties, and coordinating with lenders, appraisers, and others as needed.
- Preparing closing disclosure forms that account for any repairs, credits, or changes to the sale terms.
- Delaying or rescheduling closing if material contingencies remain unsatisfied.
- Requesting written waiver statements from parties if they mutually agree to proceed without meeting a contingency.
- Canceling the transaction if contingencies are not met by specified timeframes and the parties are unwilling or unable to proceed.
The closing company will closely monitor contingencies throughout the process to ensure a smooth closing or help the parties terminate the deal if major contingencies cannot be fulfilled. Their oversight prevents disputed issues during closing and protects both buyers and sellers.
Removing Contingencies
Most contingencies will have a deadline for when contingencies must be removed in order for the real estate transaction to proceed. Contingencies must be satisfied or waived before a transaction can proceed to closing. If a contingency is not satisfied or waived by the allotted time, the buyer or seller has the option to cancel the transaction.
The process for removing contingencies varies but typically involves:
- Financing Contingency – The buyer must notify the seller and real estate agents in writing that their financing has been approved by the deadline. This is usually done by providing a loan commitment letter from the lender.
- Inspection Contingency – The buyer must indicate in writing by the deadline whether they waive or request repairs based on the inspection results. If repairs are requested, this begins the negotiation process on what the seller will fix.
- Appraisal Contingency – The buyer must provide written notice that the home appraised at or above the offered purchase price by the deadline date. If it appraises below, the buyer may negotiate a lower price or cancel.
- Title Contingency – The buyer is given a deadline to review the preliminary title report and indicate any unsatisfactory issues. Title issues would need to be resolved before closing.
- Repair Contingency – The seller must complete the agreed upon repairs by the repair contingency deadline and provide receipts and access for re-inspection.
If contingencies are not removed by the designated deadline, either party has the right to cancel the contract. Communication between both parties is key during this contingency period. The buyer should provide prompt written notice when a contingency is satisfied and the seller should complete agreed upon repairs diligently.
Risks of Contingencies
Contingencies in a real estate transaction help protect the interests of both buyers and sellers. However, they also come with some risks that all parties should be aware of.
The biggest risk is that a contingency fails to be met by the agreed upon deadline, and the buyer or seller decides to walk away from the deal. For example, if the buyer’s financing contingency falls through because they are unable to secure a mortgage, the buyer can cancel the contract and get their earnest money deposit back. The seller then has to put the home back on the market.
Similarly, if the inspection contingency turns up defects the seller won’t fix, the buyer may cancel. Or the appraisal may come in lower than the agreed purchase price, allowing the buyer to renegotiate or walk away.
Failed contingencies essentially reset the whole transaction, which can be time-consuming and disruptive for both parties. The buyer loses time finding another home. The seller loses time waiting for a new buyer.
To avoid issues, it’s critical for buyers and sellers to do their due diligence upfront. Buyers should get pre-approved for a mortgage and order inspections quickly. Sellers should disclose any known defects and avoid overpricing their home based on comps.
Proper planning and reasonable contingencies with adequate time frames help real estate deals close smoothly. Good communication between realtors and clients during the contingency period also minimizes risks. Overall, contingencies provide necessary protections, as long as all parties are prepared for the possibility of them falling through. We can help when you are thinking I need to Sell My House Fast in Richmond, VA.
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