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Whether you’re a seller or a buyer of a home, it’s important that you familiarize yourself with contingency clauses as it can play a significant role in the entire transaction you are to take on. Read on and learn more about contingency clauses in home purchase contracts below.

What is a contingency clause?

Contingency clauses contain a set of conditions or actions that must be met by either or both of the parties (buyer and seller) for a real estate contract to become binding. It is important to note though that the contingency clause or clauses will only become part of a binding sales contract when both parties agree to the terms and sign the contract. So just like any other parts of the contract, it is important that you fully understand what the contingency clauses state should it be included in your real estate contract.

Contingency clauses are usually attached to an offer to purchase a real estate and are included in the real estate contract as an essential part thereof.

What is the importance of a contingency clause or clauses?

Including a contingency clause/s on a real estate contract will give both parties the right to back out of the transaction if certain conditions or circumstances have not been agreed upon which are subject to negotiation. It may include a timeframe about the property inspection or specific terms and conditions. All contingency clauses should be clear and detailed to ensure both parties understand the terms and their obligations as stated.

What happens if the conditions in the contingency clause were not met?

Failing to meet the conditions stated on the contingency clause make the real estate contract null and void. This gives one party, usually the buyer, to back out from the transaction without any legal consequences. On the other hand, if the conditions were met, the contract becomes legally enforceable. And if one party decides to back out, they would be legally liable for breaching the contract. \

There are a lot of possible consequences that either party would face by breaching the contract such as forfeiture of earnest money or worst, lawsuits. One concrete example is if a buyer backs out and the seller is unable to find another buyer, the seller will have the right to sue the buyer for specific performance which will force the buyer to purchase the home.

Appraised Contingency

This type of contingency is aimed towards protecting the buyer by ensuring that the property is valued at a minimum, specified amount. In most cases when the property does not appraise for at least the specified amount, the contract is terminated and the earnest money is returned or refunded to the buyer.

Most common terms in an appraisal contingency allow the buyer to purchase the property even if the appraised value is below the specified amount within a specified number of days after the notice of appraisal is received by the buyer. If the buyer fails to notify the seller of any issues regarding the appraisal and the specified date has passed, the contingency will be deemed satisfied forcing the buyer to proceed with the transaction.

Financing Contingency

 

Also called a mortgage contingency. This contingency clause gives the buyer the time to file and apply for a loan to finance the purchase of the property. Like the appraised contingency, financing contingency is also aimed towards protecting the buyer as it gives him or her the right to back out of the contract and be refunded of his or her earnest money should he or she fails to secure financing from the bank, mortgage broker, or other types of private lending.

A number of days will be specified in the contingency clause where the buyer should be able to obtain financing. During the specified date or number of days, the buyer will be allowed to terminate the contract or request for an extension that the seller should agree in writing. If the buyer fails to do so within the specified date, he or she will be obligated to purchase the property even without a loan.

 

House Sale Contingency

 

The most ideal scenario is to sell your existing property before buying another one. However, the timing and financing don’t work always work out that way. A house sale contingency can protect a buyer as it gives him or her a specified amount of time to sell and settle their existing property to finance the purchase of a new one. In cases that his or her existing home doesn’t sell for at least the asking price, the buyer can back out of the contract free from any legal consequences.

On the seller’s side, however, this contingency can be difficult as they may be forced to reject another offer while waiting for the result of the contingency. But of course, the seller is given the right to cancel the contract if the buyer’s property is not sold within the date or number of days specified in the house sale contingency.

Inspection Contingency

 

Inspection or due diligence contingency gives the buyer the right to have the home inspected professionally within a specified number of days. This also protects the buyer by allowing him or her to cancel the contract or negotiate repairs based on the result of the home inspection.

A professional home inspector, like Timberline Home Inspections, will inspect the home’s interior and exterior. They are also expected to check on the home’s electrical, finish, plumbing, structural and ventilation. After the inspection, a report containing details of any issues found on the property is given to the buyer. Based on the report and depending on the agreed inspection contingency clause, the buyer will be able to:

  • Move forward with the deal should he or she be satisfied with the result.
  • Cancel the real estate contract and be refunded of the earnest money if the report revealed major issues.
  • Request for a time extension to conduct further inspections if deemed necessary;
  • Request for repairs or concessions which will be subject for negotiation. Should the seller agree, the deal moves forward. However, if the seller refuses, the contract will be canceled and the buyer will be refunded of the earnest money.

A cost of repair contingency can also be included as an addition to the inspection contingency which specifies the maximum amount for necessary repairs. In cases where the inspection result states that required repairs will cost more than the amount dollar amount specified, the buyer will be allowed to terminate the contract. The cost of repair contingency is commonly based on the sales price ranging from 1-2%.

 

Kick-Out Clause

 

This type of contingency is added by sellers to serve as their protection against house sale contingency. It states that though the seller agrees to a house sale contingency, they will be allowed to continue to market the property. If during the contingency period, another buyer provided an offer, the current buyer will be given a specified amount of time to remove the house sale contingency and keep the contract alive. Or the seller can back out of the contract and proceed to sell the property to the new buyer.

Contingency clauses can serve to protect both the seller and the buyer if properly executed and agreed upon. So if you’re in the market of selling or buying a property, be sure to read, review, and understand the contract to avoid conflicts and worst, liabilities that can even lead to loss of money or lawsuits.