When buying or selling a home, contingencies are a crucial part of the real estate contract that can help protect both parties. Contingencies are conditions that must be met for the sale to proceed. They provide a safety net, allowing either the buyer or seller to back out if certain requirements aren’t fulfilled. Understanding how to handle contingencies can make the transaction process smoother and less stressful. In this article, we’ll explain the common types of contingencies, how to handle them, and what to expect during the process.
1. What Are Contingencies?
Contingencies are conditions that must be met before a real estate transaction can be completed. They allow both buyers and sellers to avoid significant financial risk if certain situations arise. If a contingency is not met, the buyer or seller may have the option to back out of the contract without penalty.
- Protect Both Parties: Contingencies are designed to protect both buyers and sellers by ensuring that certain criteria are met before the sale is finalized.
- Examples: Common contingencies include home inspections, financing, appraisals, and the sale of another property.
2. Common Types of Contingencies
There are several types of contingencies that are commonly included in real estate contracts. Understanding these contingencies can help you navigate the contract process more effectively.
a. Home Inspection Contingency
A home inspection contingency allows the buyer to have the property inspected by a professional before closing the deal. If issues are found during the inspection, the buyer may request repairs, negotiate a lower price, or back out of the deal altogether.
- How to Handle: As a buyer, it’s important to schedule the inspection as soon as possible to avoid delays. As a seller, be prepared for the possibility of repair requests or price negotiations.
b. Financing Contingency
A financing contingency gives the buyer time to secure a mortgage loan. If the buyer cannot obtain financing, they can back out of the contract without losing their earnest money deposit.
- How to Handle: Buyers should get pre-approved for a mortgage before making an offer to minimize the risk of financing issues. Sellers should verify the buyer’s financial qualifications to ensure they are serious.
c. Appraisal Contingency
An appraisal contingency ensures that the property appraises for at least the purchase price. If the appraisal comes in lower than the agreed-upon price, the buyer may renegotiate or cancel the contract.
- How to Handle: Buyers can use the appraisal as leverage to negotiate a lower price if it comes in lower than expected. Sellers should be aware of the potential for renegotiation and be prepared to adjust their expectations.
d. Sale of Current Home Contingency
A sale of current home contingency allows the buyer to make their purchase contingent on the sale of their existing home. If the buyer cannot sell their home, they can back out of the contract.
- How to Handle: Buyers should be realistic about the time it may take to sell their current home. Sellers should consider the risks of accepting such a contingency, as it may delay the sale.
3. Negotiating Contingencies
Contingencies are an important part of the negotiation process. Both buyers and sellers may want to negotiate the inclusion or exclusion of certain contingencies to protect their interests.
- Buyer Perspective: Buyers may want to include as many contingencies as possible to protect themselves from unexpected issues. However, too many contingencies can make the offer less attractive to the seller.
- Seller Perspective: Sellers may prefer fewer contingencies to reduce the risk of the deal falling through. They may negotiate to remove or shorten contingency periods to expedite the sale.
- Compromise: The key to successful negotiations is finding a balance that works for both parties. Buyers and sellers should be willing to compromise to keep the deal moving forward.
4. Deadlines and Contingency Periods
Contingencies often come with deadlines or specific timeframes in which they must be met. Missing these deadlines can lead to delays or even cancellation of the contract.
- Stick to the Timeline: Both buyers and sellers should pay close attention to contingency deadlines. For buyers, this means scheduling inspections and applying for financing as soon as possible. For sellers, it means being prepared to respond to repair requests or appraisal issues.
- Extensions: If either party needs more time to meet a contingency, they can request an extension. This must be agreed upon by both parties in writing.
5. Removing Contingencies
Once the conditions of a contingency are met, it must be removed from the contract to move forward with the sale. This is typically done by submitting a contingency removal form.
- Waiving Contingencies: In competitive markets, some buyers may choose to waive certain contingencies to make their offer more appealing. However, waiving contingencies can be risky, as it leaves the buyer without a safety net if something goes wrong.
- Written Removal: Contingencies must be removed in writing. Once all contingencies are removed, the contract becomes binding, and both parties are obligated to proceed with the sale.
6. What Happens if a Contingency Is Not Met?
If a contingency is not met, the buyer or seller may have the option to terminate the contract without penalty. For example:
- Buyer Backs Out: If a home inspection reveals significant issues that the buyer is unwilling to accept, they may choose to cancel the contract.
- Seller Backs Out: If a buyer cannot secure financing within the agreed timeframe, the seller may terminate the contract and look for another buyer.
It’s important to carefully review the terms of the contract to understand the consequences of not meeting a contingency.
7. Tips for Handling Contingencies
- Work with a Real Estate Professional: A real estate agent can help you navigate the contingency process, ensuring that deadlines are met and negotiations go smoothly.
- Communicate Clearly: Open communication between both parties is key to handling contingencies effectively. If issues arise, address them promptly to avoid unnecessary delays.
- Stay Organized: Keep track of all contingency deadlines and necessary documents to ensure the process runs smoothly. Missing a deadline can result in the loss of earnest money or the cancellation of the contract.
Conclusion
Contingencies are an important part of any real estate contract and help protect both buyers and sellers. By understanding the different types of contingencies, negotiating effectively, adhering to deadlines, and knowing what to do if a contingency is not met, you can navigate the process with confidence. Properly handling contingencies can make the difference between a successful transaction and a deal that falls apart.
