Understanding Contingency Clauses

No home purchase goes smoothly 100% of the time. There may come a time when you have to back out of real estate contract – maybe there was an undisclosed defect in the home or it has an unmarketable title – and perhaps you are past the due diligence period. What could you do to ensure that you can safely back out of a deal with little to no consequences?

Adding contingency clauses to the real estate contract could be the answer.

What Is A Contingency Clause?

At its core, a contingency clause is a clause added to a real estate contract for the purpose of releasing a party from the contracts obligations the clause’s provisions aren’t met. For example, if a clause is added that says the contract is not valid if a specific defect is found in the home and that defect is found.

Types Of Contingency Clauses

There are several contingency clauses that can be added by the buyer or seller that you need to be aware of:

• Appraised contingency: If a home is appraised to be below a certain amount stated in this clause, say $50,000, the buyer can terminate the real estate contract or even go through with the purchase after a set number of days after they receive the appraisal. The seller can choose to lower the selling price to meet this value.
• Financing contingency: This contingency gives the buyer time to find appropriate financing for the home and guarantee their earnest money back if they cannot obtain financing.
• Inspection contingency: This contingency gives homebuyers the right to have the prospective home inspected within a specific time period and depending on the terms, back out of the deal, request repairs, or add more time for another inspection.
• Cost of repair contingency: If the home is inspected and it needs repairs, buyers can set a specific limit to how much they are willing to pay for repairs. If the cost exceeds this amount, they can terminate the contract.
• House sale contingency:
• Kick-out contingency: This clause is added by the seller in order to give themselves some kind of protection if a buyer issues a house sale contingency clause.

Talk With Your Real Estate Agent & Attorney

While contingency clauses can benefit you, they don’t always guarantee that you will be able to back out of a contract with no consequences. For example, if you don’t secure financing within the specified time in the clause, the contingency is waived and you may be obligated to purchase the home.

So before you add contingency clauses to your real estate contract, it is imperative that you consult with your attorney and real estate agent first. Their combined experience will help you create a clause that is legal, and easy to understand by all parties so no one is caught off guard or unaware of what they are agreeing to.

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The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.