Once there is an agreed upon contract for a home, as a buyer or seller, you will likely hear your REALTOR® use the word “contingencies.”  Phrases like “all contingencies are removed” or “we’ve met all the contingencies” or “we need to do to clear the contingency” may leave you scratching your head.  Contingencies in real estate are an important aspect of any transaction, so it is important to understand what the term means. Let’s take a closer look… 

What are contingencies in real estate?

Contingencies in real estate refer to the conditions that must be met in order for the real estate transaction to move forward towards completion. Depending on your contract, some contingencies are time sensitive. Contingencies in real estate exist to protect everyone involved in the contract.

You will find the contingencies that buyers and sellers are obligated to in the contract.

Examples of Contingencies in real estate

Inspection Contingencies: Home inspections give buyers a deeper understanding of the condition of a home. Sometimes larger issues are discovered by a home inspector than what a buyer would observe while walking through a home. Once a home inspection is completed, you enter in the home inspection contingency period. Your contract will list the number of days this contingency lasts. During this time, the Realtors® of the buyers and sellers will negotiate any repairs that are needed or wanted by the buyers. If an agreement cannot be reached, the buyers can exit the contract.

Finance Contingency: Many buyers chose to pursue a mortgage to purchase a home. With a pre-approval letter in hand, they begin the home buying process. The finance contingency in real estate gives the buyers time to receive a loan for the purchase of a home. Sometimes, even buyers with pre-approval letters, can have an unexpected issue arise when the loan is being examined by underwriters. If the buyer is denied a mortgage through no purposeful fault of their own, then they can exit the contract.

Home Sale Contingency:  This contingency in real estate is written into the contract when the buyer of a home needs to first sell the current home they live in before purchasing the new home.  In this case, the buyer needs the proceeds from their existing home sale in order to purchase the new home; many buyers will not qualify for an additional mortgage when already carrying one.  The debt to income ratio is too high. A home sale contingency can be risky for a seller because the seller is agreeing to take their home off the market while the buyer waits for someone to put an offer in on the current home.  If a sellers accepts a buyer with a home sale contingency, then, in the contract, a timeline is set up for how long the buyer has to sell the current home.  If the buyers cannot sell the home within the given number of days, the contract terminates and the seller’s home goes back on the market.

Appraisal Contingency: An appraisal is a third party estimated value of a home completed for the bank who is providing the mortgage. If the value of a home is less than the agreed upon sales price in the contract, then the bank will not lend the buyers the full amount of the sales price. When this happens the buyers and sellers can negotiate the sales price, negotiate how to make up the difference between the sales and appraisal price, or the buyers can exit the contract.

Title Contingency: Title companies or a real estate attorney research the records related to the ownership of a home to look for any issues. Usually any issues can be solved before the closing date. However, challenges like liens that have been placed on the home present themselves. A lien is a legal claim against a property that is used by a company when someone has an unpaid debt. If a problem with the title is discovered, the title contingency in real estate allows the buyers to determine if they would still like to purchase the property or exit the contract.

How long do all these contingencies take?

While it seems like a lot, all of these home contingencies in real estate are worked on simultaneously, and typically within about 45 days of ratifying a contract, the contingencies have all been met and the home is ready to be sold. Having a communicative Realtor® that keeps you informed of all these steps in the process will help you understand everything that is happening and keep you at ease.