In real estate transactions, the word “contingency” is sometimes used. A contingency is an addendum to the contract that gives the parties the option to back out of it if certain conditions are not met by either side. In essence, a contingency clause allows one or both of the buyers or sellers to back out of the deal without incurring. The vast majority of real estate transactions have buyer-oriented contingencies. It’s critical to understand the most typical risks that may arise in your next house sale or purchase.
Appraisal Contingency
An appraisal is needed to determine the total value of a property when obtaining money for a house. If an appraisal comes in lower than the asking price, there’s a problem if a buyer doesn’t have enough cash to make up the difference. In this example, an appraisal contingency would be helpful: it allows the buyer(s) to back out of a transaction if the appraisal price is not as high as the purchase price, or it enables the buyer and seller to renegotiate the purchase price, allowing the buyer to exit if the seller refuses to reduce his or her asking amount.
Financing Contingency
The buyer is responsible for bringing money to the deal. Whether it’s with cash, a mortgage loan, or another form of funding, the buyer is usually responsible for paying off the property. If a loan needs to be financed in order to complete the purchase, a financing contingency will almost certainly be included in the contract. When buying a home, make sure to include a lending contingency clause. This clause states that the buyer only needs to purchase it if he or she receives acceptable financing by a certain date, otherwise they will be released from the deal without any repercussions or loss of earnest deposit, which is incredibly valuable to the buyer.
Home Inspection Contingency
The home inspection is one of the most essential security precautions during the house purchase process. The buyer performs the check to guarantee that the property is in good shape. A home inspection excels at determining the overall condition of a property, allowing for easy identification of important concerns. With a home inspection contingency, especially if major issues are discovered during the examination. The buyer may take advantage of a home inspection contingency and request a reduction to cover any necessary repairs, proceed with the sale regardless of the findings, and make the repairs after moving in or back out of the transaction based on the findings without incurring any penalties..
Home Insurance Contingency
Home insurance is important: it provides protection for things like property damage, fires, natural disasters, and other issues. When it comes to a home insurance contingency, this could be a requirement that the buyer secures home insurance prior to finalizing the purchase. The contingency could be part of the loan agreement, put in place by the mortgage lender, or it could be something the seller dictates in the contract. This can be a tricky one (especially if insurance is needed prior to closing) if the property is located in an area where insurance is difficult to get, like a known flood zone or other region that experiences inclement weather and/or natural disasters.
Home Sale Contingency
For those who are also selling their own property, a house sale contingency is often included in the contract. In other words, this contingency is “I’d like to buy your house, but I can’t until my own sells.” A home sale contingency should be present on properties advertised as “under contract” or “contingent offer.” The houses are still for sale by the owners, but they are actively attempting to sell their own home. With this clause in place, buyers know that any purchase offer is subject to approval if the house is sold before closing.
Contingencies are rather frequent in real estate, and they’re not a bad thing: they help both buyers and sellers. If you have questions about contingencies, or about real estate in general, contact your local agent for more information! If you’re thinking about buying or selling this year, head to American Realty Company to see what’s currently available on the market.
