What is a Contingency Clause?

A contingency clause is an addition to a real estate contract allowing parties to withdraw from the agreement without penalty under specific circumstances.

A Longer Definition: Contingency Clause

Contingency clauses allow buyers or sellers to withdraw from a real estate transaction under specific conditions without facing legal or financial consequences. They offer protection against issues with the home, its title report, buyer qualifications, or any unknown factors at the time the offer is accepted.

Most contingency clauses in a real estate contract provide protection for the home buyer, although some clauses may protect the seller.

Contingency clauses are especially crucial for protecting earnest money. When a contingency clause is exercised, the buyer can legally withdraw from the contract and reclaim their earnest money, which might otherwise be at risk.

Common contingency clauses in a real estate contract include:

Home Inspection Contingency

A home inspection contingency clause gives buyers the right to hire a home inspector to identify potential problems with the property. If the home inspection reveals significant issues, such as structural damage or outdated electrical systems, the buyer can negotiate for repairs, a price reduction, or even opt to withdraw from the contract.

Mortgage Financing Contingency

The mortgage financing contingency clause specifies a time frame for the buyer to secure mortgage approval. If the mortgage cannot be approved within the agreed time, the buyer can exit the contract without financial penalty. Some sellers may prefer buyers to be pre-approved for a mortgage before accepting an offer, thus reducing reliance on this contingency.

Home Appraisal Contingency

The home appraisal contingency ensures the property’s appraised value meets or exceeds the agreed sale price. If the appraisal comes in lower than the purchase price, the buyer may renegotiate the price, cover the difference with additional funds, or choose to withdraw from the agreement.

Sale of Current Home Contingency

The sale of current home contingency allows a buyer to withdraw from the purchase of a new home if their existing property doesn’t sell within a specific time frame. This clause provides security for buyers who may be dependent on the sale of their current home to finance the new purchase.

Title Contingency

A title contingency protects the buyer from future legal disputes over property ownership. This ensures the title is free from liens, encumbrances, or other legal complications. Title contingencies are often used in all-cash deals.

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Contingency Clause: A Real World Example

First-Time Home Buyer Stories - Contingency Clause

Consider a first-time home buyer who submits an offer to buy a property. The offer includes a home inspection contingency, which the seller accepts. Both parties sign the contract, and the buyer submits their earnest money and hires a home inspector.

During the inspection, the inspector discovers water damage, a weak foundation, and faulty plumbing. The buyer becomes aware of the risks and the high cost of addressing these issues.

The buyer exercises their home inspection contingency to withdraw from the deal and recovers their earnest money in full.

Common Questions About Contingency Clauses

What happens if a home buyer can’t meet a contingency in the contract?

If a buyer is unable to meet a contingency, such as securing mortgage approval or selling their current home, they can generally withdraw from the contract without forfeiting their earnest money.

Are contingency clauses negotiable?

Yes, contingency clauses are negotiable. Both buyers and sellers can discuss and agree upon the specific terms, time frames, and conditions of each contingency before signing the contract.

Can a buyer add contingencies after an initial offer?

Adding contingencies after an initial offer typically requires an amendment or a new agreement, which must be approved by both parties.

What are the standard contingency clauses in a real estate purchase contract?

Contingency clauses vary by state and local real estate customs. There are no universally standard clauses, and they may differ depending on the specific transaction and jurisdiction.

Is it common to have multiple contingencies in one contract?

Yes, it is common to include multiple contingencies in a single real estate contract, with each addressing different aspects of the transaction to provide various protections for both parties.