Understanding Contract Contingencies

Understanding Contract Contingencies

If you are preparing to buy or sell a home, then you need to understand contract contingencies prior to entering into a residential sales agreement.

Sellers should understand that most real estate contingencies are there to protect the rights of the buyers. Contingencies give buyers the opportunity to withdraw from a contract should the contingency not be satisfied. For example in the case of a financing contingency, if a buyer is unable to obtain a mortgage, he is entitled to a refund of his earnest money and the contract is voidable. There are often timelines by which the contingency must be satisfied.

The most common contingencies buyers and sellers will find are:

• financing contingency - This protects the buyer's earnest money should he not be able to obtain financing for a mortgage loan.
• appraisal contingency - This protects the buyers from paying more for the house than the appraised value. If the appraised value is less than the purchase price, then the buyer has grounds to re-negotiate the purchase price to the appraised value or it becomes a voidable contract.
• inspection contingency - The sales contract may be contingent upon the buyers obtaining inspections of the home. Inspections may include those for wood-boring insects, lead-based paint, structural and mechanical systems, septic systems, radon testing and other operations of the home.
• sale of home contingency - A buyer may make the sales contract contingent upon the sale of his current home. This protects the buyer from owning two homes at the same time and also helps ensure the availability of cash to the buyer for the purchase of his new home.

While these are the most common contingencies, a buyer can make the contract contingent upon just about anything. For example:

• survey contingency - A buyer may want the land the home is situated on to be surveyed ensuring he is getting the lot size that is quoted in the MLS or to make sure a neighbor has not encroached upon the property.
  
• square footage contingency - If a buyer suspects that the square footage quoted is not correct, he may place a square footage contingency. The buyer would then have the home professionally measured ensuring that he is getting the square footage as quoted in the MLS.
• school contingency - If a buyer wants a certain school, he may put this into the contract until he has the opportunity to verify the schools.
• spousal approval contingency - This contingency is common when one of the buyers is not available at the time of writing a contract. It would be contingent upon the missing spouse's approval of the home.
• CC&R (covenants, codes and restrictions or regulations) contingency - This contingency usually relates to those homes located within a homeowner's association. For example, the buyer may want to put up a fence and find that the CC&Rs, restrict the presence of a fence. This contingency would allow the buyer to get out of the contract should he find something unacceptable in the CC&Rs.

The seller does have the option of insisting on an escape clause. An escape clause permits the seller to continue to market the property until all the buyer's contingencies have been satisfied or removed. The buyers may decide to obtain the right to eliminate the contingencies if the seller receives a more favorable offer. Basically, the buyer satisfies or removes the contingencies within a certain timeframe such as 24-48 hours. If the buyer doesn't satisfy or remove the contingencies, then the contract becomes voidable and the seller is free to accept another offer.

It is important for sellers to understand that contracts do sometimes become voidable due to adverse findings during contract contingencies. Sellers should wait to make other housing arrangements or moving their furniture, until all contingency matters have been satisfied or removed. If the seller is buying a new home, he would have a sale of home contingency protecting him from purchasing the new home should the sale of his home fall through. However, if the seller is obtaining temporary housing that requires a large deposit, he should wait until all contingencies have been satisfied or removed prior to making temporary housing commitments.

If you are having difficulty understanding contract contingencies, you should always discuss them with a knowlegeable REALTOR® prior to making any financial commitments associated with the move to a new home.

If you are looking to buy or sell a home in Franklin TN, contact Tammie White at (615) 495-0752.