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Guide to Real Estate Contingencies

Real estate contingencies are contractual conditions in a lease that impact the sale of a property. These conditions keep in mind that not all transactional information may be available during the initial real estate agreement between buyer and seller. 

Contingencies in a real estate contract cover a variety of conditions that must be met in order for the contract to be legally binding, and are meant to safeguard buyers and occasionally sellers as well.

After the existing and agreed upon contingencies are completed, they are removed from the contract. Without these contingencies, a real estate contract becomes immediately binding, meaning the buyer is legally obligated to purchase the home in any condition.

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Here are some basic rules when it comes to real estate contingencies.

Contingency Rules

Contingency Contracts Are Conditional

Contingencies determine whether or not the real estate contract is binding. For example, the contract could only be binding if one or more requirements are meant. Contingency contracts are dependent on certain situations.

Base Contingencies on Specific Events

Contingencies need to be based on specific, measurable events in order to be understood and agreed upon by every party. 

For instance, you cannot say the property must be “improved,” since that is an immeasurable descriptor. In this case, what needs improvement needs to be clearly and specifically defined for it to be a legal contingency.

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Contingencies Need Deadlines

Setting a timeline for real estate contingencies is essential. This ensures that the closing process goes according to plan, and neither party is left waiting without a set date on which their closing transaction is complete. This also holds both parties accountable for the contingencies by a certain date.

Agreements Should Be Binding

Finally, contingency agreements should be officially binding. Ensure every contingent is clear and understood by all parties so that all conditions are met and everyone can agree that the contract is non-negotiable later on.

Who Benefits From Real Estate Contingencies?

When it comes to real estate contingencies, the buyers are typically the party that benefits the most. 

A well-written real estate contract with fair contingencies can provide a clear picture of the homebuying transaction and allow the buyers to purchase with confidence. If contingencies are not met, buyers can still walk away from the transaction without any harmful repercussions and the seller can relist their home easily.

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Home sellers may see contingencies as a liability, since they allow buyers to potentially walk away from the deal — but if both parties agree on the negotiations, contingencies can provide reassurance and make the closing process fair, friendly, and simple.

Types of Contingencies in a Lease

Contingencies in real estate reduce several risks for homebuyers, so different contingencies are needed in order to represent a wide variety of situations. Here are some common real estate contract contingencies.

Mortgage Contingency

A mortgage contingency is dependent on and sets a timeframe for the buyer to acquire a mortgage loan. This contingency states that the buyer (or the seller) won’t be charged with penalties for backing out of the contract if the buyer cannot secure a mortgage by a certain time. 

If the buyer cannot secure the specific home loan approval outlined in the contract in time (usually within 21 to 30 days), they can have their deposit returned.

Appraisal Contingency

If the sale price of the home doesn’t fall within the fair market value that an appraisal determines, the appraisal contingency protects the buyer. 

For instance, if a buyer agrees to purchase a home for more money than it eventually is appraised for, the buyer can choose to walk away from the deal without penalty.

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Home Sale Contingency

If you’re a buyer who is waiting on the sale of your current home before you purchase a new one, the home sale contingency is a good idea to have in your real estate contract. 

The home sale contingency states that the contract will only move forward if the buyer’s current home sells by a certain date. If the buyer cannot sell their current home by that date, they are allowed to get their deposit back and the deal can be cancelled. 

This contingency helps out buyers since they won’t have to juggle two homes and two mortgages at the same time, but may be inconvenient to sellers since they would need to wait for their buyer’s home sale.

Inspection Contingency

A home inspection contingency is a great way to ensure that the home in question is in the described condition, and that a buyer is getting what they’re paying for. 

With this contingency, the buyer has the right to have the home inspected by a certain date and have plumbing, electrical, and structural components evaluated before the contract is binding. Based on the home inspection, the buyer can end the contract without penalty or go through with the sale.

Insurance Contingency

Buyers, sellers, and mortgage lenders can request an insurance contingency to make sure that the homebuyer acquires homeowners insurance before the closing sale. 

Homeowner’s insurance covers situations such as floods, fires, earthquakes, property damage, and other damage-causing disasters. Without this insurance, the future value of the home could decrease. 

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Kick-Out Clause

A kick-out clause can benefit the home seller if the buyer proposes a home sale contingency. 

Instead of waiting an unspecified amount of time for the buyer to sell their current home, the kick-out clause allows the home to go back onto the market and the contract to be terminated if the buyer doesn’t complete their current home sale by a specific time. 

Title Contingency

If any issues exist with the legal record of homeownership, also known as the home title, the title contingency states that they need to be resolved completely and transferred free and clear to the new owner before the contract is binding. If the title still has issues, the buyer has the right to step away from the deal.

What Does “No Contingencies” Mean?

As a homebuyer, if you waive contingencies on your real estate contract, you may be favored as a quick and easy decision for sellers, since the contract won’t be complicated. But remember, you’re also waiving your protection from getting locked into a contract that may not be as good as it seems. 

Become Familiar With Contingencies

A set of agreed upon real estate contingencies at the beginning of the negotiation can be helpful to both the seller and the buyer and make the closing process fair and transparent. 

[Related: Guide for Renters Curious About Owning in Seattle]

Contingencies can prevent the buyer from dealing with potential issues and allow them to back out without consequence if a situation goes awry, and certain contingencies can also protect sellers from taking their home off the market and reducing their home’s value.

If you’re a potential homebuyer, you should research and become familiar with the aforementioned contingencies — and Seattle Mortgage Planners can help. We can assist in every step of your first-time home buying journey, from understanding the home loan process to applying for a purchase loan, and all the tips and tricks for purchasing a home in Seattle

Contact us today to get started!

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