The house hunting is now over. You have found the home and finally made an offer. If the buyer accepts then both parties sign a Purchase and Sale Agreement. Chances are this contract may include contingency clauses.
Let’s us now discuss the WHATs and WHYs of contingency clauses.
WHAT is a contingency clause?
It is a provision in the contract that both parties agree on. A contingency clause will include conditions or demands that must be met before the sale is finalized.
WHY is it included in the contract?
This will allow either party to “escape” from any obligations under the contract when the stipulated conditions are not met.
For instance, the buyer’s ability to complete the purchase of a property is contingent on obtaining a loan. If the buyer is unable to do so, then both parties may walk away from the contract.
There is a number of contingency clauses that you may encounter in any real estate transaction. Let us discuss the most common.
Four Common Types of Contingency Clause
WHAT: Contingent on Buyer’s Ability to Obtain Financing
WHY: Just like in the example, the buyer may stipulate a clause in the contract that the completion of the sale will depend on his ability to secure a mortgage.
In a real estate transaction, the buyer consequently provides an earnest money when the offer is accepted by the seller. The sale will be completed once the financing contingency is met.
On the other hand, if the buyer fails to come up with sufficient funds then both parties may walk out of the deal. The buyer gets to have his deposit back.
In the absence of the financing contingency clause, the deposit can be forfeited in favor of the seller.
WHAT: Contingent on the Result of an Inspection of the Property
WHY: This is another type of contingency clause that is often included in the contract. The buyer may insist on a professional to conduct an inspection of the property. This is despite the disclosure made by the seller.
The buyer may request for a price reduction or completely forego the purchase should the result of the inspection be undesirable. The inspection may include pest report, roof report, soil report, sewer lateral report, or any reports that are of concern to the buyers
WHAT: Contingent on the Appraised Value
WHY: The property will be appraised as initiated by the lender. The lender will not cover the difference on the price if the result of the assessment shows a lower value than what was negotiated,
When this happens, the buyer has an option to pay up the difference and proceed with the sale. Otherwise, he or she may request a lower price or let go of the transaction.
WHAT: Contingent on Selling the buyer’s current home
WHY: This contingency clause is applicable when the buyer’s ability to purchase a new home is dependent on selling his current home. Both parties will agree on a deadline. The buyer may cancel the offer if the property remains unsold after the deadline.
In conclusion, when a buyer submits an offer with contingency clauses the seller may counter the offer with his or her own contingencies. This part can be exhausting and frustrating. Be sure that you have the help of a trusted and competent real estate agent every step of the way.
The real estate agent is able to help carefully draft the contingency clauses. This is understood and agreed upon by both parties to avoid any disputes in the future.
Do you have questions about the contingency clauses? I can help answer your questions. Please fill out the form below for a free consultation. Indicate the best time for me to call you back.
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