What Are Contingencies in Real Estate?
Whether you’re buying or selling a home, it’s inevitable to come across some difficulties down the track. However, some of them can be avoided through contingencies. Contingencies are stipulations in the sale contract that will protect buyers and sellers in case some things go awry. Read on below to know all of them:
Appraisal Contingency
This contingency is used to make sure that a property is worth the specified minimum amount. It protects the buyers in case the property’s sale price doesn’t fall under its market value.
For example, you and the seller agreed that you will buy the house for $250,000 but it’s only appraised at $220,000. Because your lender is allowed to loan you up to the market value of the property, you need to make up for the $30,000 difference. You can renegotiate the price with the seller, or find extra cash to make up for the difference. However, if those options aren’t possible, the appraisal contingency will allow you to back out of the transaction, without any fees or other complications.
This contingency may also include terms that allow the buyer to purchase the property even if the appraisal value is below the specified amount within a certain number of days after the buyer is notified of the appraisal value. Buyers can use this period to negotiate with the seller to lower the selling price to the appraisal value. If the buyer doesn’t notify the seller of any issues regarding the appraisal within a specified date, they cannot back out of the deal and buy the property.
Mortgage Contingency
Also called financing contingency, this enables the buyers to have the time to seek and obtain financing to buy a home. It provides protection to buyers in case they don’t get financing from any type of lending—they can back out of the contract and recover the initial deposit.
This contingency has a specified period of time where the buyer has to get funding. They have until the end of this period to end the contract or request an extension which needs a written agreement with the seller. If the buyer fails to terminate the contract before the specified date, they are obligated to buy the property even if they haven’t secured a loan.
Home Sale Contingency
In case the buyer is unable to sell their current home before buying the other one, a home sale contingency can help them. This contingency gives the buyer a specified period of time to sell and settle their current home to help finance a new one. If ever the existing home won’t sell for at least the asking price, they can back out of the transaction without hassle.
On the other hand, the seller maintains the right to cancel the sale contract if the buyer’s home is not sold within the specified amount of time.
Due Diligence Contingency
Due diligence contingency, also called inspection contingency, enables the buyer to have the property inspected within a specified period of time. The buyer can cancel the transaction or negotiate repairs based on a professional home inspector’s findings.
A home inspector checks the property’s exterior and interior, structure, plumbing, ventilation, and finishing. They will provide a report to the buyer detailing the condition and any issues discovered during the inspection.
Kick-Out Clause
This clause provides protection to sellers against a home sale contingency. While the buyer can add the home sale contingency, the seller can add a kick-out clause to allow them to continue to market their home.
If another eligible buyer appears, the seller can set a deadline for the buyers to remove the home sale contingency and retain the contract. If the buyer doesn’t, the seller can back out of the deal and sell to the new buyer.
Title Contingency
The property’s title is the record of ownership, showing the past and present owners of the homes and recording any judgements or liens made against the property. Usually, the buyer’s solicitor or a title company will review the title and resolve any issues before closing so that the property can be transferred freely to the buyer.
However, if problems with the title couldn’t be solved before closing, the title contingency can protect the buyer. This contingency gives the buyer the option to back out of the sale instead of dealing with issues such as contested ownership or debts.
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These contingencies can help your selling or buying journey become a little easier. Make sure that you consult a real estate agent or a solicitor to ensure your protection in case of troubles. If you need help or some advice, don’t hesitate to drop a line!
