REPOST: Real Estate: What is a Contingency?

Contingencies, which are conditions or criteria included to an offer on a home, play a key role in determining whether a deal will push through or not. Learn more about this concept and how it influences real estate sales by reading the article below:

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What is a Contingency?

Quick Definition: A Contingency is condition put in a contract that must be met for the contract to be binding. Common contingencies include financing, inspection, and others which protect buyers of real estate and their earnest money.

In-Depth Explanation of Contingency

Contingencies, in general, are conditions of a contract. They need to be fulfilled for the contract to go through. In real estate, contingencies can be put in place that protect buyers and sellers from financial or other harm. Contingencies are written so that all parties to the real estate contract understand the they need to fulfill certain obligations before the real estate closing can happen.

The most common contingencies you'll hear about are financing contingencies and inspection contingencies, although there are many others. Financing contingencies can be written in many different ways, but the overall point is to make sure the buyer properly applies for financing, and to protect that buyer from financial loss in case the financing is not available.

Financing contingencies will often have a timeline in which the buyer must apply for a mortgage. The terms of the financing are often disclosed to the seller: down payment, type of loan, etc. The seller uses this information to determine the strength of the buyer's ability to purchase the property. If the buyer follows the terms of the contract, and the lending institution can't deliver the funds to make the home loan possible, the buyer usually has an option to get out of the purchase contract without losing earnest money.

Inspection contingencies work in a similar way. They will have a timeline in which the buyer can inspect the property (which should be done with a professional inspector), and then respond to the seller. The buyers can accept the property in its current condition, ask the seller for repairs or a monetary credit, or disapprove the inspection and end the contract. These contingencies can vary based on timelines and disclosures necessary to enforce them, so be sure to consult with your Realtor and/or a real estate attorney to make sure you understand your contract.

How contingencies could affect your real estate transaction:

Contingencies are the basis for contracts going forward, or contracts dying. Buyers use them as their safeguards. If you're buying a home, you'll need to pay strict attention to the timelines on your contingencies. Have you applied for a mortgage in the right amount of time? Buyers should get pre-approved before even visiting properties for sale, but the contingency may allow more time.

Have you inspected the property, and provided a written response notification to the seller within the correct amount of time? If not, your earnest money deposit may become forfeitable to the seller in case you don't close on the home.

If you're selling your current home to buy another, you may have a property sale contingency or a pending sale contingency that allows you to rescind the purchase of the 2nd home if the 1st doesn't go through. There are a wide range of contingencies, and you should be coordinating with your Realtor to make sure everyone is on the same page.

Melissa Yardy is a professional real estate broker with over 30 years of solid experience. Check more real estate trends and updates here.