Contingency Contracts: Pain in the Butt or Life Savers?

by : Eddy Kicker

The answer to the above question really depends on your point of view.

A contingency is basically a condition of a contract that allows one party an out if the condition is not met. In real estate, a contingency clause allows a buyer to cancel the contract with no penalty if something, for example, the results of an inspection, doesn't meet their approval.

From a sellers perspective, contingency contracts are usually a pain. They mean the buyer is going to have some tests and inspections done to some or many aspects of the home, and their agreement to buy rests on the results. While it seems straightforward, and that a seller should know in advance whether their home is likely to pass or fail such inspections, it isn't always the case. If the exact terms of the contingency aren't stated in the contract, it is easy for a buyer with cold feet to back out, using one of the terms as an excuse, even if the home passed the inspection. Was the garage included in the dry-rot inspection? Was the term that the sale would go ahead if the inspector deemed the home safe, or only if something met the buyer's standard? All of this needs to be completely clear from the get-go, otherwise, the results are open to interpretation, and that can often lead to misunderstandings.

Also, if a seller agrees to sale that is contingent on the buyers home also selling, without agreeing to a short time-limit, they could end up waiting for many months for their sale to be final. It can be tempting to take an early offer, but while the seller is waiting for their buyer to also sell, they could be missing later offers for quicker sales.

However, from a buyers perspective, contingency contracts can be a real relief, if not a necessity. For example, a buyer may not be able to obtain a loan without certain aspects of the home meeting their bank's approval. Also, say you see a beautiful home, and want to make an offer right away before it gets snapped up, yet you don't want to fall for a "too good to be true" scenario. So you make an offer, with your purchase contingent on making sure the home is what it's being marketed as. Fair enough. A seller that disagrees might make you wonder what they are hiding. So many times a home has been purchased only for the buyer to discover some hidden flaw they overlooked. No one wants to find themselves in that situation. Similarly, there are times when you find your dream home for sale, but still haven't sold your existing home. Knowing you can't afford it now, but that it will be well within your price range once your home sells, you hope the seller will accept your contingent to sell your home first.

The key to making contingency contracts work is to clearly outline the terms before agreeing to anything. If the time frame is too long, or the term too vague, don't sign a thing. Depending on what state you are in, the law will vary as to what is expected, however there are a lot of common contingencies as well. Before you put your home up for sale, or consider buying a home, do a bit of research to see what laws will likely impact your real estate transaction. Being well informed is half the battle when dealing with pain-in-the-butt details like a contingency contract gone awry.