FAQ – What Are Contingencies?

When buying or selling a home, one word that you’re guaranteed to hear over and over is “contingency”. Unfortunately, “contingency” also happens to be one of those words that is difficult to define without using the actual word, itself. Here’s the gist of it:

Think of a contingency as a sort of safety net that a buyer puts in place in order to ensure that they purchase a property only after certain conditions have been met. Still with me? Rather than providing any more of a lofty or confusing definition, why don’t I give you a few examples… Most purchase offers contain three traditional contingencies.
  1. Almost all buyers want to have their attorney review their purchase contract.
  2. In more traditional markets, the majority of buyers want to have inspections conducted on the property.
  3. And, finally, most buyers need to secure a mortgage.
Taking these contingencies in order, here’s a little more information:

ATTORNEY REVIEW: Both buyers and sellers want to have their attorney review what is often times a dense and legalistic four page document. The reason for this is that a real estate attorney can ensure that none of the conditions written into the purchase contract by a potentially wily and unscrupulous agent are detrimental to their client’s financial well-being. Attorneys will traditionally spend ten or fifteen minutes reviewing a purchase offer with their client before issuing their approval and, by extension, removing the attorney approval as a contingency of sale.*

*The end goal for any contingency is removal, once all conditions have been met.

INSPECTIONS: I think that we can all agree that the average person does not want to purchase a property where the furnace is non-operable or the roof is leaking water into the living room or the foundation is about to collapse in on itself. The means by which buyers are able to avoid this disastrous predicament is by ensuring that their purchase offer is contingent upon professional inspections. Traditionally, within seven days of acceptance of an offer, buyers will have an engineer and often times a chimney or furnace inspector walk through the property on their behalf. Shortly after, based on the inspection report, the buyer will then ask the seller to make certain repairs that they deem necessary in order for them to feel comfortable moving forward. If, after some negotiating, buyer and seller can agree to a list of repairs, this inspection contingency will then be removed as a contingency of sale. Once our office receives a signed Inspection Contingency Removal, we typically consider the deal to be solid and the property goes pending in the Multiple Listing Service (MLS).

MORTGAGE: Without writing a mortgage contingency into a purchase contract, a buyer could potentially be sued by a seller for non-performance should they find themselves unable to secure financing from a bank or lending institution. As a result of having this mortgage contingency in place, the buyer is obligated to move forward and transfer title into their name only if a bank or lending institution finds them credit worthy and approves their financing. Once a buyer has been approved for a mortgage, the bank will distribute their approval letter and, in doing so, they have assisted the buyer in removing the mortgage as a contingency of sale. This is very often the last contingency to be removed.

Occasionally, a fourth contingency may be written into a purchase offer, having to do with the sale and transfer of title of the buyer’s existing residence. This, ironically, is what most real estate agents refer to as a contingent offer. Because the aforementioned contingencies are so common, they don’t typically stick out as an impediment to the sale. However, because a “contingent offer” relies upon the sale of the buyer’s existing residence, this contingency is not quite as common or appealing to a seller. That being said, there are certainly occasions in which a seller, unable to sell their property through more traditional means, is willing to work with a buyer who needs to first sell their existing residence in order to finance the purchase of their next.

Of course, there are a host of additional contingencies that can be written into any purchase offer. However, these four conditions constitute what is common to perhaps 98% of all purchase offers. While the wording may seem a bit tricky, I hope that this breakdown makes things a bit more clear!
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