Real Estate Purchase Contract Contingencies

You recently found the perfect home, and you want to make an offer before someone else does.  You also want to be sure that certain concerns or questions you have about aspects of the property are addressed before you close the deal.   This is where contract contingencies come in.  You would make your purchase contract "contingent or conditional" on those concerns or questions being answered to your satisfaction.  By including contingency clauses that specify satisfactory results, you build in an escape hatch that allows you to legally walk away from the deal if the conditions you specified are not met.

Contingencies are very common in real estate purchase contracts.  They are also very important because they are safeguards from problems that may be unknown at the time the contract is written.  For instance, the home may have a plumbing system issue that the seller is not aware of.   Or you might encounter a financing problem that you did not anticipate.   Clearly defined contingencies covering inspection and financing would address these two situations.

Inspection and financing contingencies are two of the more common contingencies in offers to purchase real estate.  Their inclusion is quite logical.  You want the option to cancel if the results of a professional home inspection fall into one of your "deal breaker" categories.  Examples of these might be major structural defects, mechanical system problems, termites or other wood destroying insects, or safety or health issues like mold or radon.   With respect to financing, you certainly do not want to be locked into contract performance if you are unable to secure needed and suitable financing.  Thus you would include a contingency clause that releases you from the purchase if the type of financing you specified in the contract cannot be obtained.

Other contingencies include those that cover appraisals, property title, and sale of an existing home:

Appraisals -- Some buyers might want to make their purchase contingent on the home appraising at, or above, the purchase price.

Deeds -- In the case of a property title or deed contingency, the offer would state the type of deed that is to be provided at closing, along with clear title -- the property is free of liens and legal questions regarding ownership.

Existing Home -- If you currently own a home and need to sell it before you can close the deal on your new home, you would include a contingency clause to that effect.   All sellers might not welcome this contingency.  In fact, in a sellers' market -- one where buyers are plentiful and available homes are few -- this contingency might get your offer immediately rejected by the seller.  If not, the seller may come back with his or her own contingency known as a "kick-out" clause.  This essentially says that the seller is willing to accept your contract subject to the sale of your current home, but they will continue to market their home.  If another qualified buyer comes along, the seller will give you a certain amount of time -- specified in the clause -- to exclude your contingency and buy their home or decide not to go through with the purchase.

Think carefully about the contingencies that you want to include in your contract.  You can start by brainstorming on what questions or concerns you have and then translate those into contingencies.  Try not to go to the extreme with unnecessary contingencies.  When you make a purchase offer, you should do so in good faith.  The object of contingencies is not to give you an easy way to back out of the contract.  Contingencies are designed to ensure that everything that is important and required for you to close the deal is covered.

If you do decide to include contingencies, be sure they are specific and clear.  Clearly spell out the details of each contingency as well as explain what will happen if the contingency is or is not met.   There should be no doubt as to what you are trying to achieve.   If you have any questions or uncertainties about how a contingency should be worded, you can always seek advice from a real estate attorney.

Information is for educational and informational purposes only and is not be interpreted as financial or legal advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.