Q: What are contingencies in a real estate purchase agreement?
A: Contingencies exist in a purchase agreement to protect the interests of the buyer. Contingencies allow certain events to happen to the buyer’s satisfaction in order to proceed with buying a property. If the event did not occur to buyer’s satisfaction, then the buyer could cancel the purchase agreement and not proceed with the sale. Also, in most cases the buyer would be refunded their earnest money deposit. Buying a home is a big deal, and it is best if a buyer has contingencies in place so that you are buying the home on your terms.
There are several types of common contingencies in a purchase agreement. There are financing contingencies. Even though a buyer may hold a pre-approval letter, further investigation of the property or the borrower by the lender may result in a loan denial. Also, the financing contingency could contain terms of a loan such as interest rate. If the interest rate were to be above the amount defined in purchase agreement, the buyer would not have to proceed with the purchase. Other common financing contingencies could include loan type, closing costs, loan application or down payment amount.
If financing is involved, the lender will most likely require an appraisal of the property. This would create the need for an appraisal contingency in the purchase agreement. This would make the purchase agreement contingent upon the property actually appraising for the sales price. If a lower appraised price is received, the appraisal contingency could allow the buyer to cancel or ask the seller to lower the purchase price to the appraised amount. Buyers generally do not want to pay more than the appraised value of the property. If the appraisal contingency was not included in the purchase agreement, a buyer would be obligated to pay the higher contract sales price in the event of a low appraisal.
The right to inspect the home is another key contingency a buyer should consider when making an offer. This will allow the buyer the opportunity to make inspections of the property including a professional home inspection. The inspection contingency usually defines what will happen based upon the inspection results. It may allow for the right to ask for the seller to perform repairs. If the requested repairs seemed unnecessary or costly, the seller could choose not to proceed and cancel the contract. The inspection contingency would allow the buyer to make any type of inspection they felt necessary including wood destroying insect infestation (termite letter,) radon, mold, heat & air systems, roofing, septic system or any other mechanical or structural component of the home.
If a buyer is selling a home, generally they would include a contingency in the purchase agree to allow this to happen. If the buyer already has a contract on their house, the contingency would this sale to close before purchasing the new home. In the event their sale did not close, the buyer would not be obligated to close this new home sale. Also, a purchase agreement may be contingent upon the buyer procuring a buyer for their home and closing. In other words, they do not have a contract to close their property at the time of making an offer on the new home.
There are many other types of contingencies that a buyer can use in a purchase agreement to protect their interest and suit the buyer’s individual needs. Individualized circumstances could create unique contingencies such as a legal settlement, sale of an asset, withdrawal from a retirement fund, gift from a relative, etc. Keep in mind to limit your contingencies to what is absolutely necessary to protect your interest. The seller may not consider a contract with several contingencies for fear of taking their home off the market only to have the deal fall through because of a buyer’s contingency.
As a buyer moves toward closing, contingencies are removed one by one.
Get answers to questions you might have about real estate from Randy Durham, who is president of the Chattanooga Association of Realtors and a broker with Keller Williams Realty. His column appears on Sundays. Send your questions to Business Editor John Vass Jr. at jvass@timesfreepress.com