What is a contingency and what are the different contingencies in a real estate contract?
Okay so you find your dream home, your agent writes up the offer, the seller agrees to your offer, you paid your earnest money deposit – your now Under Contract the home is yours IF you meet all of the requirements of the contract and all of your “conditions” are met.
Let’s first look at the real estate definition of a contingency: A contingency clause defines a condition or action that must be met for a real estate contract to become binding.
You know how you have UNconditional love for your family, well in Real Estate – you agree to purchase and love this home as long as your "CONDITIONS" are met, then you will purchase it and love it forever… and to protect yourself if these "conditions" are not met you have these contingencies in place.
These contingencies give you a certain number of days from the day your offer is accepted and your under contract. They allow you to “bow out” of the contract so if one of these "conditions" does not meet your needs. You can then terminate and back out without any legal consequences. If you terminate and the contract by your contingency time frames in your contract, you will receive your earnest money back.
There are 3 "Main" Contingencies in a Real Estate Contract
You have a due diligence contingency – this is the time you can really “sleep on” the offer of the house. You can check things out like the schools, neighborhoods, get a property inspection to check the condition of the house, etc. This time frame is usually an average of 10 days from the day you went under contract. If any of these items don’t check your boxes and you want out, you can terminate the contract.
Next you have an appraisal contingency – This allows the buyer an average of 20 days from the day you went under contract to have the property appraised and ensure the value is adequate to the amount you agreed to purchase it at. Lets say you agreed to pay $200,000 for your dream home and the appraisal came in at $198,000 – a few things can happen - #1 you simply terminate the contract and walk away, #2 you agree to pay the $2,000 difference and move forward with the purchase #3 the seller reduces the sales price to $198,000. In either case, this is a protection that you don’t pay more for the house than what it is worth.
You also have a financing contingency – This also allows the buyer an average of 20 days from the day you went under contract to allow the lender time to finalize all of your financing conditions and give you that “clear to close”. If something happens with your financing, you lose your job, purchase a car during this time and your credit score tanks, or any other reason the lender cannot give you financing, you can terminate the contract.
Another way the Financing contingency protects you is by interest rates, so if the day you place an offer on the house the rates are at 3% - your agent may put in your offer that if the rates increase to 3.5% or more, you can terminate the contract. Interest rates change everyday and while a spike like that within a month is uncommon – its still best to have yourself protected in the event they do.
There is one other contingency that is possible to add to your offer and that is a Home Sale Contingency – In most all cases, it is easier to sell your home first then buy another home, but sometimes the timing and financing don’t always work out that way. A home sale contingency gives the buyer a specified amount of time to sell and settle their existing home in order to finance the new one. This type of contingency protects buyers because, if an existing home doesn’t sell for at least the asking price, the buyer can back out of the contract without legal consequences.
House sale contingencies can be difficult on the seller, who may be forced to pass up another offer while waiting for the outcome of the contingency. The seller retains the right to cancel the contract if the buyer’s home is not sold within the specified number of days.
With this in mind, the seller, they may accept your Home Sale Contingency with a level of protection for themselves on what is known as a Kick Out clause. This means the seller, even though they are under contract with you, they can continue to market the property for sale to other buyers. If another qualified buyer steps up, the seller gives you (the current buyer) a specified amount of time (such as 72 hours) to remove the house sale contingency and keep the contract alive. Otherwise, the seller can back out of the contract and sell to the new buyer.
Hopefully, this helped you answer all of your questions about Contingencies in a Real Estate contract! My goal is to help you achieve all of your goals in life & in real estate so be sure to check out my other blogs and resources to help you, or please share this content with someone if you think it could help them. Until the next one, stay blessed!
Melissa English is a Real Estate Agent and Investor in the North Georgia market with hundreds of closed transactions and nearly a decade of experience in real estate. She is also the founder of GeorgiaKey.com - a real estate investing company that specializes in purchasing property offering quick closings in as-is condition.