Bruce & Pam Wachter, REALTORS
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What are Contingencies?Many times buyers make an offer to buy a home before they sell their current home, or even before they list it. And so, they must sell their present home to be able to make a down payment on the new home. And so, the purchase contract for the new home is made "conditional" on the successful sale of their own homethat is a contingency.
Contingencies are an important component in real estate contracts because they limit a buyer's or seller's responsibility to fulfill the contract terms, and therefore, close the deal. Contingencies can be major, or minor.
The above example, in a seller's market, would not be acceptable to most sellers. A buyer with a home to sell first should have their home listed AND have an accepted offer, a contract in escrow.
Other contingencies are reasonable, and are built-in to a contract.
Most contracts contain clauses whereby the purchase is "contingent" upon the buyers ability to obtain financing. If the buyer can't obtain the loan, they can't buy the house. Also contingent may be the interest rate that the buyer will have to pay, or points in obtaining a mortgage. If either of these exceed a ceiling limit the buyer has indicated in the financing portion of the purchase contract, he may walk away from the deal without penalty.
Another contingency may be that the property appraises at or above the agreed-upon purchase price. Since the appraiser is hired by the lender and is independent of the actual transaction, that is another reasonable contingency.
In addition, there are inspections. Buyers will often want to be certain the property passes these inspections, so these are additional contingencies.
Real estate contract are different from most contracts because of contingencies.
Most contracts are set at the time of offer and acceptance. They are a straightforward and without contingencies to performance. Both parties are liable to fulfill their obligations no matter what. If either party attempts to renegotiate any terms of the contract, the other party can "void" the original offer and acceptance at his choice.
Real estate contracts have specific clauses which allow renegotiation of the contract terms in limited areas.
The real estate purchase contract may require a buyer to get his home inspection completed in fifteen days from the date of the contract. It allows the buyer a certain number of days to review the inspection report and report any problems to the seller. If no problems are reported, that contingency automatically disappears. The closing process continues.
But what if an inspection is performed within the required time frame, and it reveals a leaking toilet in the master bath and the buyer reports that problem to the seller.
What happens now?
The buyer and seller renegotiate that aspect of the deal, i.e., the results of the inspection contingency.
The seller may decide to have the toilet repaired -- or he may decide not to. The buyer decides whether it is worth losing the house over a broken tile or not. The seller decides whether it is worth losing a buyer over a small thing that can be easily remedied.
But, the problem could be a faulty roof, water damage, a cracked ceiling. These would require more serious thought. Should the seller not wish to repair these faults, or should he not wish to lower the agreed-upon price, the buyer can simply walk away from the deal without liability. But it is clear that the inspection contingency can be negotiated.
It is important to know that buyers or sellers can and do add contingencies to the purchase contract, some reasonable, and some ridiculous. It is imperative that each have a clear understanding of how these contingencies can affect performance. Working with a seasoned, experienced Realtor is extremely helpful; and remembering that any contract should be reviewed by the parties personal attorney is important, too. Contingencies are part and parcel of real estate contracts and so are renegotiations -- but only in limited areas and according to the contract. While real estate contracts can be loaded down with legalese, it is important to have an understanding of the elements of a contract, including the all-important and sometimes crucial contingencies. Read your contract. If you have any questions, ask them. If you dont understand the answer, ask again