The Use of a Real Estate Contingency Clause Gains Popularity in Market Shift

real estate contract with contingency

The Use of a Real Estate Contingency Clause Gains Popularity in Market Shift

In the hot real estate market we recently experienced, using a real estate contingency clause was not a common practice. However, with the recent shifts in the market and buyer behavior, we will see a rise in the use of contingency clauses in sales contracts.

Contingent means “depending on certain circumstances.” A real estate contingency clause can be written into a sales agreement so the buyer can explore or satisfy certain conditions before they are ready to move forward with the sale. It provides the buyer with a safe exit strategy preventing them from losing their earnest money.

The common real estate contingency clauses include:

Mortgage Contingency

The buyer has a specific time to obtain the necessary financing approval for the home purchase.

Title Contingency

The title company will do a title search of the property for the buyer’s review. If there are any objections to the status of the property, the seller will have to rectify the issues to close the home.

Home Inspection Contingency

A specified period is allowed for the buyer to have a home inspection and report the findings to the seller, along with any repair requests. The buyer can also terminate the sales agreement. Reasons to terminate might include if the inspection is unsatisfactory or the seller refuses to make or compensate for repairs.

Home Sale Contingency

If the buyer needs to sell their current home to purchase a new home, they may elect to have this contingency written into the agreement. The parties will negotiate a deadline to determine an acceptable date for the buyer to sell their home.

Appraisal Contingency

An appraisal contingency ensures that the home appraises for the indicated sales price or a minimum sales price. If it does not, the buyer can cancel the contract. This contingency is commonly a lender’s stipulation if the buyer is financing.

Homeowners Insurance Contingency

The buyer must apply for and obtain a homeowners insurance policy on the property. Either party can terminate the contract if they cannot attain the insurance. 

Any real estate contingency clause’s requirements must be satisfied before a sale can close. The contingency clauses are included in the buyer’s initial offer or added throughout the negotiation phase.

These contingencies protect either the buyer or the seller by providing a way for a designated party to back out of the transaction if certain conditions can’t be met. 

There are several benefits to using contingencies in a real estate sales contract, both for the buyer and the seller. 

Some of the most common benefits include:

Protection for the Buyer 

Contingencies provide a way for the buyer to back out of the transaction if certain conditions are not met, such as if the buyer cannot obtain financing or if the property inspections aren’t satisfactory. This helps protect the buyer’s investment and ensures they are not stuck with a property that does not meet their needs or expectations.

Protection for the Seller

Contingencies can also protect the seller. For example, a mortgage contingency ensures the buyer can obtain financing approval by a specified date. This helps protect the seller from the possibility of the sale falling through if the buyer cannot secure funding.

Negotiating Tool

Contingencies can be a negotiating tool. For example, a buyer may be willing to offer more for a property if they know they will have a mortgage contingency included in the sales contract, which gives them added protection in case they are unable to secure financing. Similarly, a seller may accept a lower offer if the buyer is willing to remove certain contingencies, such as a home inspection contingency.

Closing Date Protection

Some contingencies also specify the property’s closing date and are helpful for both buyer and seller to protect their interest. For example, a buyer may include a contingency that allows them to cancel the contract if the closing date is delayed beyond a specific date, ensuring they do not lose out on other opportunities. On the other hand, a seller may include a contingency that requires the buyer to close by a specific date, which gives the seller a sense of security in case they have other transactions lined up after this one.

Legal Safeguards

Contingencies also serve as a legal safeguard, legally enforceable in the contract. In addition, they provide a clear understanding of the terms and the requirements of both the buyer and the seller, which can be helpful in case of any dispute.

Contingencies are essential to a real estate transaction and provide valuable protection for buyers and sellers. They help ensure that the transaction goes smoothly and that both parties are satisfied with the outcome.

Contingency Period

Each contingency should have a designated timeframe to complete. The type of contingency determines the time. The requirements will vary depending on the kind of contingency. The responsible party must meet them within the timeframe unless both parties agree to extend. All rights are forfeited if the contingency period expires without a response or an extension.

Why are contingencies coming back?

Before the post-pandemic hot real estate market, a real estate contingency clause was not an unusual addition to any offer. However, because the inventory of homes was so scarce during the past few years, many buyers were excluding any contingency to have their offers even considered in multiple offer situations.

The competitiveness of the market spurred the trend of fewer or no contingencies. With limited inventory, buyers often faced a multiple-offer situation on homes they wanted to buy, causing many buyers to choose to waive many contingencies in their offer. As a result, sellers are more likely to accept an offer with fewer contingencies to ensure the sale of their home.

With interest rates at historic lows, buyers were more likely to secure financing or find finance programs without selling an existing home. In addition, many lenders began offering more flexible underwriting guidelines, which made it easier for buyers to qualify for loans.

As the market is settling, a real estate contingency clause has again gained importance in a real estate transaction. For buyers, a contingency can help ensure they are able to obtain financing and that the property is in good condition before closing. For sellers, contingencies can provide a way to back out of the transaction if the buyer cannot secure financing or is dissatisfied with the home inspection.

What should you know about a real estate contingency clause?

  • Contingencies are conditional. 
  • Contingencies should have a timeframe attached to them.
  • If deadlines pass, the rights to the terms of the contingency can be voided.
  • Depending on the terms, a seller may still be able to market their home during a home sale contingency.
  • Home inspection contingencies can be negotiated after the inspection.
  • Certain contingencies can slow down the purchase process.
  • The more contingencies included in an offer, the more challenging the negotiation can be. 
  • Most contingencies are common and do not derail the homebuying process.

When a seller receives an offer with contingencies, they must weigh the pros and cons of accepting the offer. While taking an offer with fewer contingencies may be tempting, it is important to consider any potential risks and ensure the included contingencies provide adequate protection. Your real estate professional will be able to analyze the offer and help you negotiate to get your home sold. 

To understand the closing process, read this previous blog post.

Fall-through rates

There is no reason for a seller to be alarmed when they do receive a contingency. According to statistics, the cancellation rate of sales agreements is less than 4% of sales contracts, as reported in this recent article.

Contingency clauses will become more frequent and common than over the past few years. A real estate contingency clause can play a vital role in a real estate transaction for both buyers and sellers. Buyers and sellers can confidently enter a real estate transaction when they understand the contingency clause and terms. 

Don’t let real estate contingencies trip you up; contact me, Charles D’Alessandro, your Brooklyn Real Estate Agent with Berkshire Hathaway HomeServices – Fillmore Real Estate. As a Brooklyn real estate agent with over 35 years of experience, I help Brooklyn Homebuyers and Sellers with advice and resources. Reach me by phone at (718) 253-9500 ext. 1901 or by email at [email protected].

Charles D'Allesandro

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