Contingency in Real Estate

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Definition: A contingency is a provision in a real estate contract that specifies the contract would cease to exist upon the occurrence of a certain event.

Example: "This contract is contingent upon Buyer successfully obtaining a mortgage loan at an interest rate of 6% or lower." Should rates rise quickly, and this rate not be available, the contract would end.

Also Known As: Condition

Real Estate Contract Contingency Examples

Real estate contracts and transactions have a number of very normal and common contingencies involved.

 Let's take a look at some of them to get a feel for how they work and are used:

Mortgage Approval

The contract will spell out that the transaction will only be completed if the buyer's mortgage is approved with substantially the same terms and numbers as in the contract.  In other words, if the contract specified a down payment of 30% and a conventional 30-year loan, then that's what should get approved.  Generally it's just a turn-down or approval, but sometimes the buyer will get offered a different deal and the terms will change.  The loan type may also be specified, such as VA, FHA, etc.

Insurance Approval

Along those same lines, the buyer will not want to close on the home, and the lender definitely will not, if the buyer can't get homeowner insurance.  The buyer should immediately apply for insurance to meet deadlines for refund of earnest money if the home can't be insured for some reason.

 Sometimes past claims for mold or other issues can result in trouble getting affordable homeowner insurance.

Appraisal

The deal will be contingent upon an appraisal for at least the amount of the selling price.  Should it come in lower, there will be another negotiation to see if the buyer will pay a higher down payment or the seller will lower the price to make up the difference.

 It could be a combination of both.

Closing Date

The completion of the transaction is contingent upon it closing on or before a specified date.  Let's say that the buyer's lender has a problem and can't fund the deal by the closing/funding date in the contract.  Technically, the seller can back out, though usually the closing date is just extended.  However, if the seller has another later and higher offer waiting, they may leave the deal.

Inspection Related

The deal may be contingent on the buyer accepting the property "as-is," common for a foreclosure deal.  More often there are various inspection related contingencies with due dates and requirements that the buyer accept the inspection results or object to them with terms for repairs that the seller can then either accept or reject.

Satisfactory Walk-through

The closing will happen if the buyer is satisfied with a final walk-through of the property the day of or day before closing.  Should there be a problem, such as something missing like a light fixture or doors, then there will be problems.

 Believe it or not, I had one deal where all of the custom interior doors were gone.

Sale of Another Home

Sometimes the buyer is only going to be able to close if they get the funds from the sale of their current home, which is usually under contract.  The new deal is contingent upon that deal closing and funding.  When this is part of the initial contract negotiation, sellers may not accept the buyer's offer if they have others coming.

Just About Anything

Either the seller or the buyer can put most any type of contingency into a contract negotiation.  I once had a deal where the buyer made the sale of a vacation property contingent upon the seller putting a fence around the propane tank, as the buyer didn't want to look at it or do the job after closing.

Contingencies are common and normal in real estate transactions.  Usually they're just part of the process and everything moves smoothly.  However, now and then crazy people on either buyer or seller side can cause problems.

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