Contingencies in Real Estate Contracts

EscrowIn real estate contracts the contingency is a common element. Contingencies are clauses in a contract that give either the buyer or seller a way to get out of the contract if certain conditions or timelines aren’t met. A commonly used example is that of a buyer making an offer on a new home before selling his existing home. The buyer needs to sell his present home before being able to get financing on the new one. So he makes his offer contingent upon the sale of his existing home. There will always be a time period associated with such a contingency. If the buyer is able to get his present home sold within that time period, the deal can go forward. But if he fails to sell within the specified time period, the seller has the option of getting out of the deal. In most cases, sellers won’t accept this kind of contingency, because they will most likely feel that they can find another buyer capable of closing the deal without needing to sell another home first. However, a 72-hour kick-out clause can be added that states that the buyer has 72 hours to release that contingency from the contract or the contract becomes null and void. This situation happens when the sellers get a back-up offer that does not contain this contingency. New home builders are often willing to accept an offer contingent upon the sale of an existing home.

Every contract can be unique. The possibilities for contingencies are virtually endless. Some of the more commonly used contingencies would include:

Financing. Contingencies that depend on the buyer being able to obtain financing are very common. These contingencies usually have an interest rate limit included so that if you are able to get financing but not at the interest rate acceptable to you then you would still be able to get out of the contract.

Home Inspections. Probably the most common type of contingency is the “contingent upon satisfactory completion of inspection”. There are any number of specific types of inspection for which a contingency might be included in a contract. Some of the more common would include inspection by a qualified home inspector for hidden defects, pest inspections, water and sewage system inspections, inspections dealing with the presence of radon or mold, etc. The timeline given to complete an inspection is specified in the contract by the buyer but may be negotiated by the buyer and seller. A typical and usually accepted inspection timeframe is 5-7 days. If the inspection results in defects in the home that you are not comfortable with you are able to get out of the contract based on the inspection results. Home inspections can cost between $150 – $350 and is determined by square footage, type of home, etc. and is set by the inspection company. A pest inspection is also recommended and is sometimes performed by a separate company. In Florida it is highly recommended due to the possibility of termites. A pest inspection usually costs about $50.

Appraisal. It’s not unusual for a buyer to have a contingency that allows for a formal appraised value at or above purchase price. Since lenders will nearly always want an appraisal performed too, sellers usually don’t have a problem with this.

Remember, just like everything else in real estate contracts, contingencies are negotiable. Always take care before signing that you are comfortable with all contingencies included in your contract. Likewise, take time to think about what contingencies you might like to have added.

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