What are contingencies in a real estate contract?
A contingency is a formal clause in a real estate contract that lists particular conditions that the buyer or seller must meet in order for the principals to proceed to the next step in the contract. Contingencies, found in all offer-to-buy or offer-to-sell 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 to 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 certain amount, at a prevailing interest rate within a specific period of time. If the buyer is successful in obtaining a mortgage as described, the mortgage contingency is said to be “eliminated.” If the buyer does not obtain a mortgage, the contingency is not met 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 because it allows him to terminate a contract without penalty, including the return of deposits made, if the home inspection reveals that the home is not suitable due to problems such as material defects, significant termite damage or dangerous electricity . wiring. If the discovered problems can be fixed, the buyer has the right to negotiate the repairs he wants with the seller. In turn, the seller may agree to repair everything, some things, or in some cases even refuse to make any repairs. If agreement on repairs cannot be reached, the contingency cannot be removed and the contract is void.
Other Common Contingencies
There can be as many contingencies in real estate contracts as there are needs of buyers and sellers. Although most contracts are repetitive, it is more common for additional contingencies to be added depending on the protections needed by the principals. 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 have signed 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 protection for both buyer and agent, especially in states where agents can add contingencies as needed.
Buyer’s Home Sale Contingency – Agents refer to these contingencies as Hubbards. A Hubbard can be used effectively in any type of market; however, they are used more often 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 does not sell within the stipulated time (usually 2-3 months) and the buyer does not want to purchase the new home without the sale of their old home, the new home purchase contract is voided without penalty. This prevents the buyer from becoming too leveraged by owning two homes at the same time.
However, there is a caveat that provides some protection for the seller. During the period assigned 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 specified period of time to locate a new home after an offer to purchase has been accepted. If suitable housing is not found, the seller can terminate the contract without repercussions. Like buyers, most sellers would rather sell the house they’re in than buy another. If sellers don’t have a pressing need to sell and can’t find a substitute home they like, they may decide not to sell at all.
Contingencies may be as varied as circumstances require. For example, suppose you’re a buyer and find a home that’s almost perfect, except it lacks the in-ground pool you had your heart set on. You wouldn’t mind installing the pool yourself after you buy the house, but you have no idea if the backyard is big enough to accommodate a pool that would meet all the city’s requirements for distance from the road and adjacent properties. . Your agent or attorney can write a contingency into your purchase offer that allows you a specific amount of time to investigate the feasibility of installing a pool and allows you to terminate the contract if the yard does not accommodate a pool.
Buyers’ contingencies can include anything from asking a seller to remove a rundown 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 on the property after the sale or having the offer of sale depends on the closing by a certain 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 either the buyer or the seller tend to weaken the position of each. Sellers should demand as little as possible from buyers to avoid being rejected, and buyers risk having their offers rejected if contingencies are perceived as unpleasant by sellers.
The second point to remember is to work with an experienced, licensed real estate agent and a local real estate attorney to make sure the contract protects your interests. Once you’ve secured a strict and orderly contract, you can relax knowing your rights are protected.