When negotiating on the purchase of a house or property, buyers and sellers can include contingency clauses. Both parties must sign off for the contingencies to become a part of the purchase agreement. Once agreed upon, all contingency clauses must be met in order for a real estate contract to become binding. If not satisfied, contingencies give buyers and sellers a way to back out of the deal without any legal repercussions.
Contingencies must be clearly stated and can include specific circumstances and time frames. While there can be a number of contingencies a buyer or seller can request, too many clauses can make the other party wary. Below are the five most common contingency clauses in real estate.
Buyers want to know that the home they are purchasing doesn’t come with any major safety or health concerns. Once the home inspection is completed, the buyer and buyer’s agent will review the inspector’s report. Some issues can be negotiated; buyers can request that the seller fix or pay for items of concern. However, if there is a significant issue, such as a problem with the foundation, the buyer can choose to walk away from the deal.
While potential buyers have gone through the pre-approval process, it can take time for a loan to come through, and occasionally the loan falls apart. The financing, or mortgage, contingency gives buyers time to secure a loan. If unable to obtain a loan, buyers can use the financing contingency to get back their earnest money.
Mortgage lenders will use the appraisal of the house as a factor to determine if a loan is granted. If the purchase price is significantly more than the value of the appraisal, chances are the financing will fall through. The buyer then has the opportunity to renegotiate with the seller to lower the purchase price or back out of the contract.
Clear Title Contingency
The title is a legal document that shows the past and current owners of the house and property. As part of the sale process, a title company checks for liens or issues with the title. Problems with the title can often be worked out by the seller before closing, so it can be transferred over to the new owner. If issues cannot be resolved, however, the clear title contingency states the buyer can leave the sale.
Home Sale Contingency and Kick-Out Clause
If you currently own a home and are looking to buy a new one, the home sale contingency states you have a specific amount of time to sell your current home. If you cannot sell your house, this clause allows you to walk away from the deal.
While the home sale contingency is popular amongst buyers, it can be risky for sellers. The kick-out clause is a compromise to this situation, stating that the home can stay on the market even though a contract has been signed. After a specific period of time, if the sellers find a new buyer who does not require a home sale contingency, they can void the first contract and sell to the more qualified buyers.
Make sure you go through all the contingencies on the purchase agreement and ask your Realtor to clarify any questions before signing. Whether you are a buyer or a seller, contingencies can help you get out of a deal that poses a risk you didn’t initially know about.