Real Estate Contingencies

There are many important things to pay attention to when navigating the world of real estate contingencies. It can be confusing and frankly a little intimidating. But don’t worry! Let Gig Harbor’s top real estate agent, Paige Schulte, answer your burning questions about all things contingencies and offer writing.

1. first and foremost, What is a contingency in a real estate contract? 

A contingency is a clause in the contract that says “I will buy this house IF ______ (insert contingency) is met.” If that contingency is NOT met within the stated time frame, the buyer (and in some rare cases, the seller) may exit the contract with no repercussions.

2. What are some various examples of different contingency clauses in a real estate contract?

The most well-known contingency used is the Inspection Contingency, allowing a buyer to bring in an inspector to inspect the home prior to purchasing it. It’s a chance to “look under the hood” to know what you are getting before you commit.

Another contingency that is used often in a contract is a Home Sale Contingency. This means that the offer is contingent on the buyer selling their home first so that they can use those proceeds to purchase the home. If the buyer’s current home doesn't sell in a timely fashion instructed by the contract deadline, the buyer is okay to exit and earnest money is refunded. 

This is just the tip of the contingency iceberg. You can have contingencies on water well tests, septic and drain field inspections, homeowners insurance, Homeowner Association review, Title contingencies, and of course, financing (i.e. can you get approved to purchase the home?).

So now we know the list of contingencies you can have is LONG.

3. But which contingencies should absolutely be included in a contract at minimum to protect the parties involved, and why? 

Ideally, a buyer wants as many contingencies as possible to protect them during the contract-to-close phase so they can change their mind if they want without losing their earnest money deposit. The ones that should absolutely be included are home sale contingencies, appraisal, financing, and inspection (and septic if necessary). There are ways to tighten up the timelines on these to make them more attractive in a HOT seller’s market without giving them up completely. But in very hot markets like 2020 has been, the contracts with the fewest contingencies win.

For sellers, if you are accepting a contract, the fewer contingencies the better. You want to hire an agent that knows contract language and timelines so they know what to strike to prevent buyers from getting cold feet in hot markets. You may also want tighter timelines in slower markets so you don't take your home off the open market too long, missing peak buying season because a buyer changed their mind. 

There are few ways for a seller to exit contracts, but the financing addenda when used correctly can give some leverage to the seller.

4. What happens if a contingency is not met? And more importantly, what are the repercussions? 

If a contingency is not met within the timeframe allowed, it may just waive and be okay (this is common with contingencies like HOA review). BUT if you have an inspection contingency and you are a buyer requesting repairs and you do not turn in that repair request by the deadline, you just purchased the home as-is and waived the contingency by non-response. You are now unable to exit the contract using that contingency. If that was your only contingency, the only way to exit is to forfeit your Earnest Money Deposit (assuming you wrote that into the contract as well).

What can the buyer and seller do in this situation? 

If a buyer waives the Inspection contingency and didn't mean to, the seller can work with them to do some of those items, but they are not obligated to. If they want the contract to stay together, though, both parties may compromise on the items. Otherwise the buyer CAN opt to walk away and forfeit their Earnest Money. The seller would keep the funds and put their home back on the market.

If a Home Sale contingency is not met in the timeframe (meaning the buyer’s home did not sell by the deadline), the seller may release the Earnest Money Deposit and the contract is terminated (this happens most often). There are times when a seller can extend the contingency period and allow that buyer to stay in the contract. But this takes some negotiation, possibly more money, and good faith that the buyer is making a true effort to sell their current home. This is also very dependent on the market conditions to get a Home Sale contingency accepted.

5. What should home buyers consider before putting in a contingency in a real estate contract?

Buyers should ask themselves what they need to know about the home to be sure they want to purchase it, and then write in those contingencies. HOWEVER, what do the current market conditions allow? In 2020, we are in some of the most competitive buyer situations ever, and eliminating as many contingencies as possible is how buyers are winning in multiple-offer situations. In this case, pre-inspections are a great way to investigate a home that is going to need a waiver of Inspection contingency to win. 

6. What should home sellers consider before putting in a contingency in a real estate contract?

This question should really be “before accepting a contingency in a real estate contract.” They need to understand the timelines, know how many exit points their buyer has to leave the contract, and for how long. The sellers should look for AS FEW contingencies as possible. The fewer contingencies, the stronger the offer and the more sure the deal will close.

7. Any last thoughts, tips, or ideas? 

If you are a buyer, write in as many contingencies as the market will allow. If you are a seller, get as few as you can. AND, know where the exit language lives in the standard purchase and sale contract, then strike those exits too. 

In 2020 the cleanest contracts win. And clean means no or very few contingencies, all the money, guaranteed purchase price, and maybe your kidney.

Have more questions about how to win as a buyer or get the smoothest transaction ever during your home sale? Contact me today to chat. 

Learn more about Buying with me or Selling with me.