A vital component in real estate transactions is the inclusion of a loan contingency clause, which sets forth conditions that must be met before a sales agreement is binding.
Specifically, a home loan contingency clause grants the buyer the privilege to conduct an independent appraisal, professional inspection of the property, and secure a mortgage.
The contract’s finalization hinges on the satisfactory fulfillment of these conditions.
How Real Estate Transactions Unfold
Real estate transactions typically start with a buyer proposing a purchase offer to a seller, who then decides to accept, counter, or reject it. Negotiations often ensue until both parties reach an agreement.
Upon mutual acceptance, the buyer usually submits an earnest money deposit, typically 1% to 2% of the sale price, held by an escrow company as the closing process kicks off.
Real Estate Contingencies Explained
Contingency clauses can be part of a real estate contract, giving parties the right to opt-out under certain agreed-upon circumstances.
These clauses specify time frames and terms, ensuring clarity for all involved parties. Failure to meet the conditions renders the contract null and void, allowing one party, often the buyer, to withdraw without penalties.
The consequence of breaching a contingency can lead to legal actions, such as forfeiting earnest money or facing lawsuits for specific performance.
In different states, contracts and contingencies may be handled by real estate professionals or require the expertise of licensed attorneys.
Appraisal Contingency
An appraisal contingency safeguards buyers by ensuring the property’s value meets or exceeds a set minimum. If the appraisal falls short, the contract can be terminated, with potential earnest money refunds.
This contingency may allow buyers an option to proceed, even with a low appraisal, within a specific timeframe after appraisal notification. Sellers might have the chance to adjust the price accordingly.
Buyers must adhere to the specified release date to address any appraisal issues; otherwise, the contingency is deemed satisfied, removing their right to exit the deal.
Financing Contingency
A financing contingency, also known as a mortgage contingency, allows buyers time to secure funding for the property purchase. It safeguards buyers, enabling withdrawal and earnest money retrieval if financing falls through.
A set number of days is provided for buyers to obtain financing; failure to do so grants the option to cancel the contract or request an extension agreed upon by the seller in writing.
Home Sale Contingency
While ideal, selling a property before purchasing another isn’t always feasible. A home sale contingency allows buyers time to sell their existing home to finance the new one, with the right to withdraw if the existing property doesn’t sell at the specified price.
This contingency may pose challenges for sellers, who may need to decline other offers while waiting. Sellers retain the option to cancel if the buyer’s home isn’t sold within the stipulated timeframe.
In a competitive housing market, multiple complex contingencies, like home sale contingencies, could lead to offer rejections. Seek guidance from your real estate agent to include contingencies without discouraging sellers.
Inspection Contingency
An inspection contingency gives buyers the right to inspect the property within a specific timeframe. A professional home inspector’s report may prompt contract termination or negotiation of repairs based on identified issues.
The inspector evaluates various property aspects and provides a detailed report. Depending on the contingency terms, buyers can proceed, withdraw with earnest money return, request further inspections, or propose repairs or concessions.
Cost-of-repair contingencies might supplement inspection contingencies, setting a maximum repair expenditure. If repair costs exceed this amount, buyers could opt to terminate the contract based on this contingency’s terms.
Kick-Out Clause
Sellers might include a kick-out clause to safeguard against house sale contingencies. This clause allows sellers to continue marketing the property even with an existing house sale contingency, offering an alternative buyer acceptance window.
If a qualified buyer emerges during this period, the current buyer is granted a set time to waive the house sale contingency and retain the contract. Failing this, sellers can withdraw, selling to the new buyer.
Risks Associated with Contingencies
Including contingencies in offers can be risky, especially in competitive markets, where sellers may be hesitant. Consult with real estate professionals to determine the appropriate contingencies to include.
In hot markets, buyers may even opt to exclude appraisal contingencies to increase offer acceptance, though this manoeuvre carries its own fiscal risks.
Challenges Posed by Contingencies
Contingencies present challenges within real estate contracts, potentially adding stress for both buyers and sellers. Deadlines must be met, with delays risking buyer decisions or sellers’ relocation plans.
What Are Some Examples of Contingencies in Real Estate?
In real estate transactions, common contingencies include finance contingencies for mortgage-dependent buyers, appraisal contingencies ensuring property value meets expectations, and inspection contingencies enabling professional assessments.
How Long Is a Contingency Period on a House?
Contingency periods vary based on their type, with financing contingencies spanning 30 to 60 days and inspection contingencies often lasting 10 days or less.
What’s the Difference Between Contingent and Pending?
"Contingent" and "pending" on real estate listings signify transaction stages. Contingent implies a binding offer with outstanding conditions, while pending suggests an offer with either no contingencies or all waived, closer to finalization.
The Bottom Line
Understanding real estate contracts and their contingencies is crucial for successful transactions. Due diligence is essential, as missing deadlines could result in financial consequences.