If you’re in the process of buying a home you may have heard the term “contingency.” These are clauses in your contract that give you an out if something unforeseen arises from the time you make an offer until you close. Real estate contingencies protect you from losing your earnest money if you walk away from the transaction and can give you leverage when negotiating with the seller.
Most real estate transactions include contingencies. In fact, 98% of buyers said they included a contingency in at least one of their offers, according to the Zillow Group Consumer Housing Trends Report 2022. Contingencies work to the buyer’s advantage, so they might include multiple contingencies on their offer. On the other hand, in competitive markets, buyers might waive all contingencies to appeal to the seller and gain a competitive edge.
What is a real estate contingency?
A real estate contingency is a part of the purchase and sale contract that details specific, measurable conditions that must be met by a preset deadline to successfully advance the deal. If the conditions are not met, the buyer can choose to terminate the contract.
Real estate contingencies come in a couple varieties. A “hard contingency” requires you to sign off physically, but a “soft contingency” simply expires at a certain date. If you need to cancel the contract because of a contingency, your offer should include the precise method to notify the seller. Your agent or real estate attorney can guide you through this legal process.
What is a contingent offer?
A contingent offer is when a buyer makes an offer to purchase a home, but reserves the right to back out of the deal, with their full earnest money deposit, if the conditions of the contingency clause are not met.
Pros of a contingent offer
By using a contingent offer, buyers may protect their initial investment of earnest money, reduce the risk of investing in a home with unforeseen issues and avoid financial trouble if they’re unable to acquire a loan.
Buyers can draft real estate contingencies for almost anything that would make them not want to buy the home. This includes the functionality of the home systems or aesthetic repairs.
Cons of a contingent offer
In competitive markets where sellers can choose from multiple high-priced offers, those with the fewest contingencies tend to have an edge. According to the Zillow Group Consumer Housing Trends Report 2022, 39% of buyers say they waived at least one contingency. Only a seller with limited options would accept an offer with excessive contingencies. Your agent can provide guidance around the most important contingencies to include in your specific offer while remaining competitive.
Common real estate contingencies
While drafting your purchase offer, a good real estate agent will balance the market value of the property, the local bidding competition and tactics to appeal to the seller while protecting your investment with real estate contingencies. Some contingencies are unavoidable; if you plan to purchase a home with a mortgage, your lender will likely require an appraisal. An appraisal contingency and a financing contingency protect your earnest money.
Here are some contingencies you may encounter while buying a home:
- Disclosure contingency
- Inspection contingency
- Appraisal contingency
- Financing contingency
- Home sale contingency
- Kick-out clause
- Title contingency
- Homeowners insurance contingency
- Homeowners association contingency
Disclosure contingency
The first contingency you’ll typically encounter in the process of buying a home will be your acceptance of the seller’s disclosure form. When the seller accepts your offer they will have a short time period to provide a list of material facts they “know” about the property. Disclosure requirements vary by jurisdiction, so some sellers must share every detail they know about the property and its systems, while others may only need to acknowledge the existence of lead paint. After receiving the seller property disclosure statement, you generally have a defined period of time, such as a few days, to determine whether you want to cancel the transaction due to the disclosed issues, with a return of your earnest money deposit.
Note that some sellers may provide this form at their open house or their agent may include it on the MLS listing, before any offers are reviewed.
Inspection contingency
An inspection contingency ensures you can complete a professional home inspection by a licensed inspector, and then request repairs or credits based on the results. You’ll generally have a few days to schedule an inspection and the seller will grant full access to the property. You’ll then have a brief timeframe to request reasonable repairs or potentially terminate the transaction based on what you find. If all goes well with the inspection, the contingency is considered met.
In highly competitive markets, it’s common to hear about buyers being tempted to waive the inspection contingency to get their offer to stand out. Some sellers may claim they’re only open to offers without inspection contingencies. However, this leaves you open to potential unforeseen issues with the home, and there are other ways to leverage the inspection contingency to make an offer more appealing. For example, you can write in a 2- or 3-day inspection contingency, instead of the typical 10-day period, which assures the seller they can quickly move on to the next offer if the buyer were to pull out of the purchase after unsatisfactory inspection results.
Appraisal contingency
For buyers using a mortgage, lenders often require you to hire a professional, independent property appraiser. They will walk through the home, take pictures and measurements, and note its condition. If the appraisal comes back at or above the sale price, the contingency is considered met.
If the appraisal comes back lower than the offer price, but the purchase price is in line with comparative market analysis, you could ask the mortgage lender to have another appraisal done. Your contingency allows you to attempt renegotiating a lower sale price with the seller to match the appraisal. But in more competitive markets, if the final appraisal remains too low, the lender cannot loan you more than the property is worth and you’ll have to make up the difference in cash. If you’re unable to make up the difference in cash, the appraisal contingency allows you to cancel the contract.
Financing contingency
Another standard contingency for buyers purchasing a home with a mortgage is a loan contingency. This protects you if your financing falls through, ensuring you won’t have to pay for a home you can’t afford..
Sometimes, your mortgage contingency includes a maximum interest rate. This can protect you if you’re not already pre-approved for a loan or haven’t found a lender to work with, and you don’t yet know what interest rate you’ll be approved for by the time you’re writing your offer. If the interest rate exceeds what you’re able or willing to pay, you’d be able to back out of the home purchase without penalty.
Read your financing contingency provisions very carefully because you might need to provide proof of the loan application to the seller immediately to make the contingency effective. If you don’t meet the specific, and often tight deadline, for the proof of your loan application, the contingency could expire before your loan goes through, making your earnest money non refundable.
Home sale contingency
If you need to sell your current home to afford the new home, you will want to include a home sale contingency in the contract. This contingency lets you out of the deal if you aren’t able to sell your home. Even if you have a buyer for your existing home and it’s in escrow, you may want to add this contingency into your purchase contract to be safe.
However, including a home sale contingency can be a deterrent to sellers who want a free and clear offer that can close without delay. Talk to your lender about whether a HELOC or home equity loan might be an option to access your home equity for a down payment.
Kick-out clause
If your contingent offer includes a home sale contingency, the seller might accept it but add a kick-out clause. The kick-out clause is a contingency that allows the seller to continue marketing the home while accepting your offer.
If the seller finds another buyer, they’ll allow you a brief timeframe, typically 48-72 hours, to drop your home sale contingency or forfeit your offer.
Title contingency
A title contingency is standard in most purchase and sale contracts. It states the seller must own the title free and clear in order to transfer it to the buyer. Review the title report with your agent for any outstanding liens or encumbrances. These must be resolved prior to closing or paid out at the closing table from the seller’s equity.
Homeowners insurance contingency
To get your loan, you will have to obtain homeowners insurance. It’s not optional. However, that insurance could cost far more than expected due to the risks of your property, such as proximity to a flood zone or presence of mold. You can protect against this by making the purchase contingent upon your being able to obtain affordable insurance, formally referred to as a satisfactory Comprehensive Loss Underwriting Exchange (CLUE) report. (Your agent may need to attach a rider or an addendum to the purchase contract.)
If you’re unable to acquire affordable insurance, your contingency allows you to drop the purchase contract.
Homeowners association contingency
If the property is within a homeowners association (HOA) with requirements you reject, a homeowners association contingency is your out. Written carefully, your contingency could protect you against issues such as limited exterior paint colors or a neighboring fence in the wrong place, a strict parking requirement, the ability to rent your property or any host of things that might be deal breakers. The key is to make sure including an HOA contingency is important enough to you to outweigh the possibility of potentially writing a less competitive offer.
Discuss real estate contingencies before making an offer
By working with an experienced real estate agent, you can rest assured that your interests and investments are central to your negotiation strategy. Choose your agent carefully by reading buyer reviews and interviewing them. Discuss your concerns and property deal breakers so that your needs are thoroughly detailed in your purchase contract.