Facebook
X
Pinterest
Copy Link
When buying a home, one of the most important steps is drafting a purchase contract. This document outlines the terms and conditions of the sale, ensuring that both the buyer and seller are protected. One of the most vital components of any real estate purchase contract is contingencies. Contingencies are specific conditions that must be met for the transaction to proceed. If they aren’t satisfied, the buyer or seller may have the right to back out of the deal without penalty.
Here are 9 critical contingencies to consider in a real estate purchase contract:
1. Financing Contingency
The financing contingency, or mortgage contingency, is one of the most common and critical in a purchase agreement. It states that the buyer’s obligation to close on the property depends on securing a mortgage loan. If the buyer is unable to obtain financing within a certain timeframe, they can typically back out of the contract without losing their earnest money deposit.
2. Home Inspection Contingency
This contingency allows the buyer to hire a professional home inspector to evaluate the property for any defects or issues. If significant problems are discovered, such as structural damage or necessary repairs, the buyer can either request repairs, renegotiate the purchase price, or cancel the contract entirely.
3. Appraisal Contingency
The appraisal contingency protects the buyer in case the property’s appraised value is lower than the agreed-upon purchase price. If the home doesn’t appraise for the expected amount, the buyer has the option to renegotiate the price, bring extra cash to the table, or terminate the contract without forfeiting the deposit.
4. Title Contingency
Before the sale can proceed, a clear title must be confirmed to ensure that the seller has the legal right to sell the property, and there are no outstanding liens or claims against it. The title contingency allows the buyer to cancel the contract if any issues arise that can’t be resolved, such as liens, boundary disputes, or other legal claims on the property.
5. Sale of Current Home Contingency
This contingency is essential for buyers who need to sell their existing home in order to purchase a new one. It states that the purchase of the new home is contingent upon the successful sale of the buyer’s current property. If the buyer is unable to sell their home within a specified period, they can walk away from the contract without losing their earnest money.
6. Homeowners Insurance Contingency
Before closing, the buyer must secure homeowners insurance for the property. This contingency protects both the buyer and the lender, ensuring that the property can be insured. If the buyer is unable to obtain adequate insurance, such as in areas prone to natural disasters or with certain liability risks, they can choose to cancel the contract.
7. HOA Review Contingency
If the property is part of a homeowners association (HOA), this contingency allows the buyer time to review the HOA’s rules, regulations, financial status, and bylaws. The buyer can cancel the purchase contract if they find the HOA’s terms unreasonable or restrictive, especially if there are concerns about fees, restrictions, or governance.
8. Final Walkthrough Contingency
A final walkthrough contingency ensures that the buyer has the right to inspect the property one last time before closing to confirm it is in the same condition as when the offer was made. If any significant changes have occurred, or agreed-upon repairs were not completed, the buyer can either request adjustments or refuse to close on the property.
9. Environmental Contingency
This contingency is particularly important for properties located near bodies of water, industrial areas, or in rural locations. It allows the buyer to perform environmental tests to ensure that the property is free from contamination such as lead, mold, radon, or hazardous waste. If the tests reveal environmental hazards, the buyer can negotiate for remediation or withdraw from the contract.
Why Contingencies Matter
Contingencies are essential because they protect both buyers and sellers from unforeseen issues that could derail the sale. For buyers, they offer peace of mind by ensuring that their investment is sound. For sellers, contingencies outline clear conditions under which the buyer must follow through or be held accountable.
Conclusion
Whether you’re a buyer or a seller, contingencies play a crucial role in real estate transactions. It’s vital to understand each one and its implications to avoid future headaches. Consulting with a knowledgeable real estate agent or attorney can help ensure that your purchase contract is airtight and your interests are well-protected.
