Real Estate 101: What’s a Contingency?

The real estate process is full of legalese that’s tossed around during a transaction as if all parties are attorneys. Too often, lenders, title reps and real estate agents don’t stop to consider that the consumers that brought this deal to the table ― the buyer and the seller ― may not have a clue as to the meanings of these terms.

We’ve found that one of the most confusing aspects of the purchase agreement is the contingency. This is, simply, a condition placed on the offer to purchase. Think of contingencies as if the homebuyer is saying “if  ‘X’ comes to pass, by this date, I will purchase the home. If it doesn’t or it is late, I have the right to walk away from the purchase with a return of my earnest money.”

While conditions to be met can be anything from the sellers asking the buyer to take their golden retriever in the purchase ( “he’s used to this house!”) to the buyer asking for all of the furniture in the home, there are three contingencies that we consider pretty standard.

Buyer’s Loan Approval

Sure, today’s home buyers ― at least those that are well-versed on the process ― come into the transaction waving their loan preapproval letters. Most of the time, however, this preapproval is conditional on a whole slew of things. Until the buyer’s loan documents clear the underwriter, the loan is up in the air.

It only makes sense then that the buyer wants to protect him or herself by being able to back out of the contract, penalty-free, should the loan not go through.

Home Inspection

Unacceptable home inspection results don’t necessarily have to be deal breakers, but they often are.  This is such an important aspect of the home purchase process that our Association of REALTORS not only includes an area of the purchase agreement devoted to it but a separate Inspection Contingency Addendum as well.

“This Purchase Agreement is contingent upon a complete home inspection(s) of the property to determine its condition,” it begins and then goes on to state that the cost of the inspection falls on the buyer and that the seller must make the home available to the inspector at a time convenient to both parties.

Appraisal

If you’ve agreed to pay $250,000 for a home and the lender’s appraiser says it’s only worth $225,000 that is the maximum loan you’ll receive. At that point you’ll need to either come up with the additional $25,000, ask the sellers to lower the price, ask the sellers to split the $25,000 with you or walk away from the deal.

The appraisal contingency allows you to walk away without penalty.

Contingencies, like most items in the purchase agreement, are negotiable. Remember, right there in the purchase agreement it states that “time is of the essence.” While it’s reasonable for the buyer to make the purchase contingent on loan approval, a clean home inspection, or an acceptable appraisal, it is unreasonable to ask for 30 days to complete these items. 

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