Anyone preparing to make an offer on a property needs to become familiar with “contingency clauses” and how to use them to your benefit in a real estate contract.
A contingency is a future event or circumstance that might occur, but is not certain. A contingency clause in a real estate contract is language designed to protect a party to the contract – in your case, the buyer – from harm in the event that a specific event or circumstance does in fact occur.
Take the two most common contingency clauses – mortgage financing and appraisal. A typical mortgage financing contingency would make the sale dependent upon your ability to obtain a commitment from a lender for acceptable loan terms within a specified time period, say 45 to 60 days. If it turns out you were not able to obtain a mortgage commitment within that time frame, you would have the right to cancel the sales contract and be refunded your earnest money deposit in full.
Similarly, a typical appraisal contingency clause would give you the opportunity to amend or cancel the contract if an independent, professional appraisal of the house came in below the price stated in the contract. You could renegotiate the deal with the seller, lowering the price to the appraisal amount, or simply cancel the contract and get your deposit money back.
The core idea in both of these contingency clauses is to save you from potential problems and costs. Many standard sales contracts used by Realtors contain versions of these protections that are already built in, but some do not. When you attach them to your original offer – which when signed by the seller becomes the binding sales contract – both you and the seller are agreeing that they are integral parts of the deal itself. Your Realtor or a lawyer can help you draft the specific language you feel you need, or help in amending the language in the “standard” contract.
Other Contingency Clauses
A valuable and frequently used contingency clause involves property inspections. You don't want to buy a proverbial pig in a poke, so you need to tie the house purchase to your receipt of an inspection report from a competent professional, chosen and compensated by you. The inspection and written report should be completed within a specified time period – say 7 to 15 days from the contract ratification date. Again, many standard local real estate contracts come with an inspection contingency language built in, but where that's not the case, you need to insert your own clause.
To gain maximum leverage – and to give you an escape hatch if needed from the whole deal – you can require that the inspection report must be “acceptable.” You might also insert language requiring the seller to repair or remedy any problems turned up by the inspection. Make certain the clause covers any aspects of the house that might cause you long-term concern and expense, such as the presence of lead based paint or unacceptably high radon levels, defects in the septic system or well, plus roof, heating, air-conditioning and electrical problems.
Home Owners Association Documents
Since the rules and regulations imposed by homeowner association can affect your use and enjoyment of the property, you can insert a clause in the contract making the sale contingent upon your receipt and approval or all home owner association documents, rules and fees.
Randy Bailiff
Dean Graziosi Life and Investment Real Estate Coach
This is great advice Randy. It's something that we should all be more aware of and making sure we put into every deal that we do. It's always better to be safe than sorry.
Thanks for the information!