Contingencies in real estate can be confusing to people. The dictionary defines a contingency as “an event that may occur but that is not likely or intended; a possibility.” That’s what most people think when they hear the term. In real estate though, the term has a quite different meaning. In a real estate contract, a contingency is something that must happen by a specified date.
Contingencies are clauses included in the contract to protect the interests of the buyer and the seller. Here are a few examples where they protect the buyer:
Loan Contingency –
As you can understand, it’s absolutely vital that the buyers be able to get that loan they need to purchase the house they have just signed a contract for. If no loan, they won’t have the money necessary to close the deal. So, to protect the buyers, their experienced agent will include a loan contingency. If they cannot get the loan they need by a specific date, the contract can be cancelled. If the buyers have been assured by their lender that they do indeed get the loan, (by the date specified in the contingency), they will notify the seller’s real estate agent that they are “lifting” the contingency. In other words, the terms of that contingency have been met and are no longer a possible reason to cancel the contract.
Appraisal Contingency –
Another contingency an experienced buyer’s agent will include in the contract is an appraisal contingency. If a satisfactory appraisal is not obtained by a specified date, the contract can be cancelled.
During the course of the transaction, the buyer’s lender will have the house professionally appraised. An appraisal is a professional opinion as to the true market value of the property. If the appraisal is for an amount equal to or greater than the sale price in the contract, there will be no problem getting the loan. At least as far as this issue is concerned. If it is lower than the contract sale price, the lender is not going to loan as much money. If the buyers still want the house at the contract price, they must come up with the difference themselves. If they cannot do that, they can have their agent try to negotiate a lower purchase price to match the appraisal. If that is unsuccessful, the contract can be cancelled. This protects the buyer from being forced to come up with more cash to purchase the house.
Home Inspection Contingency –
Still another contingency an experienced buyer’s agent will include in the contract is the home inspection contingency. The buyers need to know as well as possible what the true condition of the property is. That’s why they have professional inspectors inspect it and provide them with reports. They also need to be able to cancel the contract if they find out there are serious problems with the condition of the property. An inspection contingency provides for that. It will state that the buyers have until a specific date to complete inspections and approve the condition in the resulting reports. If they find serious defects or other conditions that need repairs, they can have their agent negotiate for repairs or credits to do the repairs. If that does not succeed, the contract can be cancelled. Obviously, it’s not in the buyer’s interest to be locked into a purchase contract for a home that has unexpected expensive repairs needed.
Wrapping up –
The contingencies we’ve discussed here are just a few examples that protect buyers. It’s also important to remember that, just like almost everything else in a real estate contract, contingencies are negotiable. There are almost unlimited possibilities for their use in protecting your interests during the course of your home purchase. As you can also see, it’s very important that the buyers have an experienced, savvy real estate agent who knows how to use contingencies to protect their clients and know how to negotiate for them.
There are also contingencies that can be used to protect sellers. That’s a subject for another day. I’m over my word budget for this article.
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