Understanding Contingencies

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When purchasing or selling a home, you’ll often hear the word contingency.

You know may now be wondering: What is a contingency? Well, we’re here to answer this for you. We’ll also break it down so that you can easily understand how a contingency may affect your future real estate transaction.

What’s a contingency?

First things first: A contingency is a provision in a contract that makes the agreement null and void if a certain event were to occur. In essence, this is a an escape clause for the buyer. And, it gives the buyer a reason to back out of a deal under defined circumstances.

Here are the 3 most common contingencies that you may encounter in today’s seller’s market:

1.Inspection:

This contingency is included in the offer to purchase and is satisfied before the purchase and sales agreement. It provides the buyer an opportunity to hire a professional home inspector to determine if all of the home’s major systems are functioning properly. The home inspector will generally focus on major functioning aspects of the house rather than cosmetic, code or design issues.

For example, your inspector will call attention to a heating system that is at the end of its lifespan, a window that no longer functions properly, or a stair that is loose and therefore a safety hazard. Your inspector will not focus on scuff marks on the wall or chipped tiles in the bathroom. If the inspection uncovers any major issues or home defects, this gives the buyer a reason to back out of the deal and get his deposit back.

2. Financing:

This contingency is both a part of the offer to purchase and the purchase and sales agreement. The financing contingency protects a buyer’s deposit if he is not approved for a loan. It is satisfied by an agreed upon date before closing, typically within 30 days.

3. Satisfactory attorney review of condo docs and financials:

This contingency only applies to condominiums, and is part of the offer to purchase. Often satisfied before the purchase and sale agreement, it gives the buyer and his attorney the opportunity to review all of the documents and financials for the condo association. This contingency protects the buyer’s deposit in the event that anything out of the ordinary is discovered that prevents him from wanting to buy the condo.

Besides the above common contingencies, here’s yet another one that we don’t often see in a heated-up seller’s market.

Home sale contingency:

This contingency is part of the offer to purchase and the purchase and sales agreement. It stipulates that the transaction is dependent upon the sale of the buyer’s home. If the buyer’s house sells by the specified date, the contract moves forward. If it doesn’t sell by the specified date, the contract is terminated.

When should you include a contingency?

You can make your offer to purchase contingent upon anything you like.

But keep in mind that any contingency you make as a buyer weakens your offer in the seller’s eyes.

Contingencies add potential exit strategies from the offer, and therefore they are considered additional risks for the seller.

So, if you’re considering buying a house, it’s important that you discuss all of the variables with your real estate agent. This will help ensure that your offer is accepted and you end up with the house you’ve got your eye on.

Ariel Szabo