Understanding Contingencies in a Real Estate Contract

Posted by on Saturday, March 5th, 2011 at 10:16am.

If you are buying a home, it is important to understand where and how contingencies come into play in a sales contract.

In short, every sales contract will include its share of contingency clauses. Some of these clauses are designed to protect the buyer, while others are designed to protect the seller. Either way, it is important that you understand the ins and outs of sales contracts and contingencies when buying a home. Below are several key factors to consider when reviewing contractual contingencies. Real Estate Contract Contingencies

  • Before you ever sign the sales contract you should understand each and every line of the contract. If there is something you don’t understand, ask! A home will likely be the largest purchase you will ever make, so take the time to thoroughly read the contract and understand everything that is contained within it.
  • Contingencies may be better explained as “loopholes” or “allowances.” Many contingencies allow either the buyer or the seller to back out of the deal under certain conditions.  For example, there may be a contingency in the contract that allows the buyer to back out of the deal, without consequence, if the home’s inspection reveals details about the house that are unacceptable to the buyer.
  • Contingencies often protect your “good faith” or “earnest” deposit. Without contingencies, the buyer will likely be unable to back out of a real estate deal gone bad without losing their good faith money.
  • It is important to understand that all contingencies should either be met or agreed to be removed in writing for the sales contract to be valid. It is because of this that it is incredibly important to read and understand the details of your sales contract.

In general, contingencies are designed to protect the buyer from the defects of a property. Most of the protection afforded to buyers in a contingency clause involves the results of the property inspection. Because the property inspection takes place after the sales contract has been signed by both parties, it is important, as the buyer, to be able to back out of the deal if there are surprises found during the home inspection. Other contingencies in the sales contract will usually protect the buyer following the appraisal, the termite or pest inspection, the roof inspection, or the sale of the buyer’s home.

14 Responses to "Understanding Contingencies in a Real Estate Contract"

Kellie Umstead wrote: Hi- Thanks for the great post! I am a Virtual Assistant, here in the Atlanta area and I'm looking to buy property right now, so this is right on time. I work with real estate brokers and firms doing administrative and graphic design work, so I am used to hearing various real estate topics in depth. You did a nice job making this topic clear and concise. ~Kellie, evirtualhelp.com

Posted on Tuesday, March 15th, 2011 at 5:09pm.

Pensacola Real Estate wrote: Wonderful post! It is true there are many intricacies inside a real estate contract and it is so important that the buyer understands them. A knowledgable Realtor is needed to explain these contingencies and make sure that their client is fully aware of what the contract entails. Thanks for this great information!

Posted on Friday, March 18th, 2011 at 8:35am.

Rich Cederberg wrote: We have many contingencies in our New Mexico contracts, most of which protect the buyer. Buyers need to understand the protections that are in place for them, but now that Realtors are using electronic signature services like Docusign I'm afraid in many cases the contingencies are not being explained.

Posted on Tuesday, March 22nd, 2011 at 2:03pm.

Dan Statlander wrote: Really awesome posting, with great information.

Dan Statlander

Posted on Monday, March 28th, 2011 at 11:21am.

Salt Lake Homes wrote: This is just another good piece of advice to understand further contingencies most especially when your dealing with contracts in the real estate field. Good post!

Posted on Wednesday, March 30th, 2011 at 5:11pm.

CoMortgageResource wrote: This article is so important for buyers! There are so many misleading articles and advertisements that seem to be geared towards buyers who are more vulnerable to the "too good to be true" red flags. I’d love to feature this information in the Home Buyer Learning Center section of my website www.comortgageresource.com.

Posted on Tuesday, April 5th, 2011 at 3:51pm.

CoMortgageResource wrote: I incorporated the information you provided in this post in a blog on my website, www.comortgageresource.com, entitled These Contingencies I'm Signing Off On Mean What Exactly??. I hope you think I did your post justice! Thanks again for providing the information. I have put together a whole section for home buyers but had not concentrated as much as I needed to on what happens AFTER they find the house...Thanks for the the reminder!

Posted on Tuesday, April 12th, 2011 at 8:48am.

Dan wrote: When ever I have a client that can’t qualify for a rental through a real estate agency (usually because of bad credit history) I tell them to try rent by owner sites, Including Craigslist. I have never thought to warn them about scams. Thanks for the heads up.

Posted on Tuesday, April 12th, 2011 at 8:48am.

Tina Fountain wrote: HI CoMortgageResource, saw the blog, looks great and thanks for mentioning us.
Tina

Posted on Tuesday, April 12th, 2011 at 8:51am.

Bayut wrote: Hi Tina Fountain,
You have written just another great article and it has added a lot to my information. I am agreed that it is very essential to understand all the clauses before signing a contract and must be aware of each and every line of it because it's better to get to know instead of being anxious later on due to unawareness. Your blog has helped me a lot to understand things.

Posted on Monday, April 18th, 2011 at 11:20am.

Roxanne Ardary wrote: Hi Tina

Im in South Jersey and we have similar contingencies in our standard contract. For the most part they have done a good job in covering both parties for each contingency. As an example, if the home inspection reveals defects the seller has an opportunity to fix the issues, if not then the buyer can cancel. As you said, its important for both parties to understand everything before they sign. Good post.

Posted on Saturday, April 30th, 2011 at 9:17am.

James Vasquez wrote: Tina, first off, I'd like to comment on the well-designed website that you have as well as the consisetent blog posting dating back from 2009. Keep it up.

As a relatively new Real Estate agent in San Antonio, TX, I initially struggled to understand these contractual "contingencies", but after doing a few deals, they have become more clear. I try to advise my clients to include very few contingencies, if possible, as to not cloud up the offer with 3 or 4 different ways to exit the contract. Most experienced agents won't allow their sellers/buyers to tie up a property with many contingencies...just my opinion. Thanks for the great post.

Posted on Tuesday, June 14th, 2011 at 6:38pm.

Rachel Roy wrote: Hi,
Thanks for sharing great and useful information with us about Real Estate and such a nice blog.
Thanks
Rachel Roy
“Home Builders in San Antonio”

Posted on Thursday, August 18th, 2011 at 3:13pm.

Jonathan Browning wrote: Great piece of advice. One of the things I dislike the most, in any industry, is when an agent says "this is a standard contract" and does not explain it in any more detail to the client. I know that recently we purchased some new insurance for our business and even though I re-read the contract prior to signing it, the agent went through and pointed out the more confusing aspects of it. I left feeling as though the agent had a good grasp on his his industry and the service he was providing.

Posted on Sunday, January 8th, 2012 at 7:11am.

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