What Is a Contingency in Real Estate Transactions?

Posted by Excelsior Realty Team on August 4, 2023

Are you new to real estate and wondering what is a contingency in real estate? Contingencies refer to clauses within contracts that must be fulfilled for transactions to become legally binding. Contingent offers and listings have many differences that distinguish one from the other, yet both offer important protections and obligations to buyers and sellers.

In this article, we'll outline what contingencies are and their application in real estate transactions while offering examples of contingencies buyers should include when making offers on real estate properties.

Let's delve into the world of real estate contingency!

What Is a Contingency in Real Estate- Common Contingencies

Contingencies are an integral component of purchasing real estate transactions and should always be included as part of the purchase contract. A contingency ensures certain conditions must be fulfilled prior to closing on a home sale. 
But what exactly are some common types of contingencies found within real estate transactions? Let's investigate!

What Is a Contingency in Real Estate Transactions

  • Home Inspection Contingency

Home inspection contingencies are standard clauses in real estate contracts to give prospective buyers time and space to perform an in-depth home inspection prior to closing on any deal. That helps uncover any issues not noticeable during an initial walk-through of the property and allows buyers to renegotiate terms or leave altogether if needed.

A research conducted by The American Society of Home Inspectors (ASHI) stated almost four out of every five homes purchased contain at least one issue detected during an inspection.

  • Mortgage Approval Contingency

Mortgage contingency clauses are often-included in real estate contracts, making purchases contingent on being approved for financing from lenders. 

Such contingencies provide buyers with protection should their bid not receive loan approval. Should that happen, they may withdraw or modify it accordingly.

  • Appraisal Contingency

An appraisal contingency clause in a purchase contract allows buyers to back out in case an independent appraisal demonstrates that their home has less value than was promised when entering into it.

This policy helps buyers ensure they do not overpay for properties and provides extra protection from taking on more debt than necessary.

  • Title Clearance Contingency

This particular standard clause in real estate contracts guarantees that sellers possess legal permission to transfer ownership and sell. Buyers benefit by being protected against purchasing homes that might contain outstanding liens or legal disputes that prevent ownership transfers from taking place as expected.

North American Title Insurance conducted a 2020 study on this matter. It expressed that 39% of real estate transactions revealed issues during title searches - emphasizing its necessity and value to prospective home buyers and sellers alike.

  • Sale of Prior Home Contingency

Sale of previous home contingency clauses is frequently included in real estate contracts when buyers need to sell their current property before proceeding with purchasing their next one.
Contingencies allow buyers to sell their existing property before moving forward with purchasing their dream home without risking loss.

  • Homeowners Insurance Contingency

Homeowners' insurance contingencies require buyers to secure adequate property coverage prior to closing on any sale agreement.

Contingencies help lower risks for both buyers and sellers by ensuring damages or losses caused by natural disasters, accidents, theft, or any other unexpected events are covered by insurance.

Data provided by the Insurance Information Institute showed that more than 60 percent of U.S. homes were underinsured at that point - making a homeowner's insurance contingency essential to successfully closing real estate transactions.

Essential Components of a Real Estate Purchase Contract

It's essential that prospective home buyers understand what constitutes a real estate purchase agreement (RPC). Let's get into the depth-

  • Understanding the Primary Elements of a Real Estate Purchase Contract

As an overview, let's describe what constitutes a real estate purchase contract. It comprises information regarding both parties involved - buyer and seller. In addition, property details like the description of the property as well as the address are covered within it.

Contracts outline all terms agreed to with regard to financing and mortgage arrangements, as well as important dates such as inspection contingency periods and any stipulated conditions relevant to sale transactions.

These conditions encompass various elements discussed by legalities related to state laws in their clauses and legalities presented as legal requirements. A contract brings all these components together into an all-inclusive agreement.

  • The Role of Contingencies in a Real Estate Contract

Knowledge sharing through ongoing education helps individuals make more informed decisions. For buyers, having an attorney who specializes in negotiations facilitate this process can be especially helpful; an attorney experienced at handling deals can identify any potential claims objections and address them upfront so as to reduce investment losses.

Reading and comprehending "real estate purchase contracts" carefully when exploring new opportunities is of vital importance. That'll protect financial investments and produce positive outcomes while holding individuals to their goals with complete transparency, building trust, and creating real progress.

The Importance of Including Contingencies for Buyers

Contingencies are an invaluable safety net for homebuyers. Here are a few benefits associated with including these clauses in their purchase contract:

Provides buyers the option of backing out of contracts if certain conditions aren't fulfilled.
Protects buyer financing and down payments should they not obtain sufficient mortgage or homeowner's insurance.

Provides the opportunity for revision of contract terms if inspection results do not satisfy, giving both parties an ample chance to renegotiate agreements if there are discrepancies between expectations and inspection results.

How a Real Estate agency Can Help

Navigating the complex world of real estate transactions can be intimidating for buyers. At Excelsior Realty, we understand the need for contingencies to guarantee an effortless home-buying journey.

Our knowledgeable real estate agents will assist in every stage of the purchasing agreement process and will ensure all necessary contingencies are included, leading to exceptional results and long-standing relationships between our clients and us. Our clients know they can trust us completely!

Reach out to us now so you can begin searching for your home with peace of mind!