What are contingencies in a real estate contract?

A contingency is a formal clause in a real estate contract that lists the particular conditions that the buyer or seller must meet in order for the principals to move on to the next step in the contract. Contingencies, found in all purchase or sale offer contracts, protect the interests of both buyers and sellers. Failure to comply with a particular contingency may result in breach of contract and possible penalties for the at-fault party.

Basic contingencies in real estate contracts

Contingencies are divided into categories according to their purpose:

(1) seller protection

(2) buyer protection

(3) mutual protection of both buyer and seller. Most real estate contracts contain two universal contingencies: a mortgage contingency and a home inspection contingency.

Mortgage contingency – The mortgage contingency stipulates that the buyer will do everything possible to obtain a mortgage for a specified amount, at the current interest rate within a specific period of time. If the buyer succeeds in obtaining a mortgage as described, the mortgage contingency is said to “be eliminated.” If the buyer is unable to obtain a mortgage, the contingency remains unsatisfied and the buyer can terminate the contract without penalty. Therefore, a mortgage contingency protects the buyer’s interests by releasing him from the purchase contract if financing is not available.

Home inspection contingency – This contingency protects the buyer by allowing him to terminate a contract without penalty, including the return of deposits made, if the home inspection reveals that the home is unsuitable due to problems such as material defects, major termite damage, or dangerous electricity . wiring. If the problems discovered can be fixed, the buyer has the right to negotiate the desired repairs with the seller. In turn, the seller may agree to repair everything, some things, or in some cases even refuse to make repairs. If an agreement on repairs cannot be reached, the contingency cannot be eliminated and the contract is null and void.

Other common contingencies

There can be as many contingencies in real estate contracts as the needs of buyers and sellers. Although most of the contracts are for boilermaking, it is more common that additional contingencies are not added depending on the protections that the directors need. In some states it is perfectly acceptable for the real estate agent representing the principal to add contingencies as needed. In other states, only an attorney can add a contingency.

Attorney review contingency – One of the most commonly added contingencies by real estate agents is a 24 hour attorney review. This means that after the buyer and seller sign the contract, the buyer’s attorney has 24 hours to review the contract and approve it before it becomes official. An attorney’s review ensures the legality of a contract, an important safeguard for both buyer and agent, especially in states where agents can add contingencies as needed.

Buyer’s home contingency sale – Agents refer to these contingencies as Hubbards. A Hubbard can be used effectively in any type of market; however, they are used more frequently in a slow market than in a normal market. A Hubbard contingency assigns the buyer a specific period of time to sell their current home before purchasing the new one. If the buyer’s current home is not sold within the stipulated time (usually 2-3 months) and the buyer does not want to buy the new home without selling their old home, the new home purchase contract is voided without penalty. This protects the buyer from excessive leverage by owning two houses at once.

However, there is a caveat that provides some protection to the seller. During the period allotted to the buyer for the sale of his home, the seller may continue to market the home on which the Hubbard contingency has been placed. If the seller receives a second offer from another buyer that is more attractive than the one restricted by Hubbard, the seller is free to accept the second offer if the first offeror, after being notified, does not want to proceed to closing.

Reverse hubbard – This contingency gives the seller a specific period of time to locate a new home after an offer to purchase has been accepted. If no suitable home is found, the seller can terminate the contract without repercussions. Like buyers, most sellers prefer to sell their home before buying another. If sellers don’t have an urgent need to sell and can’t find a substitute home they like, they may decide not to sell at all.

Various contingencies

Contingencies can be as varied as circumstances require. For example, suppose you are a buyer and you find a nearly perfect home, except that it lacks the in-ground pool that you had your heart set on. You wouldn’t mind installing the pool yourself after you buy the home, but you have no idea if the backyard is large enough to accommodate a pool that meets all of the city’s requirements for road mishaps and adjoining properties. . Your agent or attorney may include a contingency in your offer to purchase that allows you a specific time to investigate the feasibility of installing a pool and that allows you to withdraw from the contract if the patio does not have the capacity for a pool.

Buyer contingencies can include anything from asking a seller to remove a dilapidated shed to installing a new septic system. Similarly, sellers will sometimes present their own contingencies in their sales offers, such as asking buyers to allow them to store, for a specified period of time, a second car in the property after the sale or make the offer sale is contingent upon closing by a particular date.

There are two main points to remember when using contingencies in purchase and sale contracts. First, multiple or unreasonable contingencies on the part of the buyer or the seller tend to weaken the position of each. Sellers must demand as little as possible from buyers to avoid rejecting them, and buyers run the risk of having their offers rejected if the sellers perceive contingencies as unpleasant.

The second point to remember is to work with an experienced and licensed real estate agent and a local real estate attorney to make sure the contract protects your interests. Once you’ve gotten a tight and orderly contract, you can relax in the knowledge that your rights are protected.

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