Real estate contingencies are conditions or actions that must be met for the real estate contract to become binding. It becomes part of the binding sales contract when both the buyer and the seller agree to the terms by signing the contract.
These contingency clauses are important because they give you an out if an unforeseen problem arises and can protect you from losing your earnest money.
Common Real Estate Contingencies
1. Financing or Mortgage
When you’re the buyer, just about any home sale contract will be contingent on you successfully securing financing – after all, that’s how most people are able to purchase a home (although some homebuyers do pay cash).
This real estate contingency gives you a specific period of time to window of time between signing and closing in which to secure this funding. If you can’t get a lender to commit to a loan, you have the right to walk away from the sale with the down payment. You also have a say in what type of financing you’ll accept. For instance, you can make sure the contract is contingent upon you getting a loan of a rate of a certain amount or below, or the sale can’t go through.
Another one of the more common real estate contingencies gives the buyer the right to a home inspection before a certain date. If the condition of the home turns out to be subpar, you’ll also have the chance to either vacate the contract or require repairs.
You’ll also be free to send in your own experts to make the inspection, including professionals like general contractors, pest exterminators and more.
Buying a home that’s still being built? Consider requesting a contingency that would allow you to view the home’s construction at specific points to make sure the home is being built to your satisfaction.
And remember: it’s very common for inspection reports to open the doors to even more price negotiations between the buyer and the seller.
Lenders will require that an appraisal be completed to confirm the value of the home. If it turns out your potential new home’s appraised value falls below the sales price of the home, you have the option to either vacate the contract or renegotiate with the seller. This is one of several real estate contingencies in a typical real estate contract.
4. Sale of Your Current Home
This real estate contingency states that the home a buyer is purchasing is still subject to the sale of their current home. When a buyer isn’t able to purchase a home without having to sell their existing home first, this is one of the more import real estate contingencies to include.
Most of the time this contingency remains in play throughout the entire transaction since the sale of a buyer’s existing home and closing on the home they’re purchasing can fall on the same date.
The buyer has the option to include a real estate contingency allowing him or her to request the seller provide any permits for improvements made to the property. These can vary, but often include fences, pools, decks, sheds, basement living areas, and more.
If you suspect the seller has done any remodeling or additions to the property, you’ll want to make sure that the contract is reliant on proof that the necessary building permits were obtained and building codes were complied with.
6. Homeowners Insurance
To get a loan as a homebuyer you’ll need homeowners insurance, which can sometime cost far more than you were expecting. To protect yourself you can make the purchase contingent upon a satisfactory Comprehensive Loss Underwriting Exchange (CLUE) report, or upon your being able to obtain affordable insurance.
7. Homeowners Associations
Purchasing a home that’s part of a homeowners association (HOA) should always be contingent on your review and approval of the HOA rules & regulations. Every HOA is different and will have their own set of rules and regulations that govern everything from the color you’re permitted to paint your house to the size pets you’re allowed to own.
Real Estate Is Filled With Uncertainties
The truth is, you can run into unexpected issues at virtually any point in the homebuying (or selling) process. This is why real estate contingencies are so important – they might not shield you from disappointment, but you’ll be in the best possible position no matter what comes your way.
Disclaimer: Citywide Home Loans does not offer real estate services.