Real Estate: What are contingencies
and why they are so important
A contingency is a condition in a Purchase
Agreement which states that the agreement is reliant upon certain events taking
place, such as approval of a building inspection, delivery of marketable title,
obtaining acceptable financing or mortgage commitments, even meeting building
code compliance. Contingencies are vital to your closing because they eliminate
any ambiguity over who will pay for what, and allow a legal way for one or the
other party to cancel the agreement. Once contingencies have been removed, the
closing can take place.
Contingencies can be written for most any type
of eventuality, dependening on state law. For example, a contingency clause can
be written to provide that a seller/builder plant certain trees in the yard
before completion, that the buyer be allowed time to sell his existing house
before closing, that the buyer's approval is necessary of the title report, soil
report, property inspection reports, or of his attorney's approval of the
purchase contract. The seller may include contingency clauses which allow extra
time after closing for moving, or which limit the amount of money available to
pay for repairs.
Contingencies will contain a time limit in
which to fulfill the task. For example, an inspection contingency may give the
buyer 10 days in which to obtain and approve a pest or termite control report.
Another contingency may allow 5 to 10 days for the buyer to obtain a written
loan commitment. The seller is generally given a certain number of days in which
to deliver "marketable title" or a title report to the buyer. The buyer then can
review the exceptions listed in this report, and dispute any items which are in
question. One common example of a title exception may be an easement. If a buyer
is planning on adding a swimming pool, for example, in an area where an easement
exists, the buyer may want to be sure this will be acceptable. The purchase
contract may be contingent on an acceptable soil report, if the buyer suspects
the house sits on unstable ground.
Once a contingency has been approved, both the
buyer and seller should sign a document removing that contingency from the
purchase contract. This agreement should be given to your closing agent and real
estate representative. If the deadline for a contingency arrives, and both
parties do not sign off on that contingency, this failure to act serves as
acceptance of the contingency. For this reason, it is important to keep a
calendar of the dates for removal of each contingency.
Contingencies help prevent problems at closing
by eliminating last minute disputes covering inspections, the buyer's inability
to obtain financing, or repair work not being done according to contingency
specifications.
What are the most common contingency clauses?
Contingencies protect both parties from any
surprises and leave a way out of the contract. They should be carefully drafted
and can be made specific to your particular transaction.
Common contingency clauses include:
- Financing Contingency: allowing Buyers a
specified amount of time to obtain a loan commitment and financing which is
acceptable to them
- Inspection Contingencies: depending on your
state law, contingency clauses can be written to cover property inspections to
find possible structural problems or material defects. They can specify who
will pay for necessary repairs, and to what extent each party is willing to
pay for those repairs.
- Attorney Approval: the contract can be
contingent upon the Buyer's attorney reading and approving the purchase
agreement, title report, or any other legal paperwork, such as condominium
documents relating to the purchase.
- Special contingencies can be written into
the contract, such as:
- Approval Contingencies: such as approval by
a condominium or co-op board
- Compliance with building code contingencies
- if the Buyer suspects recent remodeling or additions were done on the
property, the purchase contract may be reliant on proof that the necessary
building permits were obtained and building codes were complied with.
- Contingent on Use: for example, if the Buyer
intends to use the property as a home office, or as a multi family residence,
the contract can be made contingent on compliance with local zoning
restrictions which pertain to that property.
- Flood, earthquake, asbestos, radon, lead,
and water inspection contingencies, if applicable for your area. Termite or
other pest inspections may be included.
- Buyer's approval of finishing details, if
for example, the purchase involves a new home not completed at the time of the
purchase contract.
- Specific contingencies written into the
agreement to fit your individual transaction, which may include a contingency
for the sale of the Buyer's previous home, approval by an out of town spouse
or family member, an acceptable soil report if buying vacant land or
anticipating future improvements, approval of the contract by a family trust,
or even confirmation of the purchase price made by an independent appraiser.
As long as both Buyer and Seller agree, a
contingency clause can be included to cover the specific interests of either
party.
Related Articles:
Table of Contents:
-
Should
you buy a home?
Renting vs. Buying:
-
Steps to buying a home
-
What is a
Mortgage and do you needed?
-
Different types of Mortgages
-
More Mortgage
Choices
-
0 to 5% down
with FHA and VA loans?
-
Cosigning: The Pitfalls
-
Qualifying for a
Mortgage
-
How much of a
mortgage and a house can you afford?
-
Finding a home with FSBOs & Real Estate Agents.
- It's closing
time: Title and the keys please!
-
Tapping your home
equity: Refinancing
-
Tapping your home equity: Home Equity Loans
-
Frequently
Asked Questions (FAQs) on Real Estate & Mortgages
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